The Risk/Benefit Trade-Off of No-Lapse Premium Guarantee Policies

Katt, Peter C.
November 2004
Journal of Financial Planning;Nov2004, Vol. 17 Issue 11, p34
Academic Journal
This article examines the viability of buying universal life policies with no-lapse premium guarantee policies (NLPG) and presents case studies illustrating risks involved when buying NLPG policies. NLPG policies have very exaggerated guarantees and probably rely on policy lapses to provide margin of safety for the companies selling them. If they do not get the number of lapses anticipated and interest rates do not soar, these policies will not be profitable for these companies. This is especially the case for the most aggressively priced NLPG policies. Also, companies selling NLPG policies have greater solvency. The dangers the most aggressively priced NLPG policies are not hysterical speculation. They are real, and notice of the dangers is increasingly widespread. Ignorance should not he a defense. Increased risks do not mean that all clients should avoid NLPG policies; it means that all clients should he advised of the possible risk, so they can make informed decisions about whether the potential advantages are more important than the increased risk. Since the presentation of NLPG policies as an option has become a staple in financial planning, a client's view of an NLPG policy should be based on the risk/benefit assessment.


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