NLG contracts: What you don’t know can hurt you

By Jeff Reed

Kestler Financial Group


There has been a good deal of discussion about the increased pricing in the no lapse guarantee (NLG) market over the last six months. While that topic is important, and continues to impact our professional lives, there is another aspect of these contracts that may turn out to be much more of an issue over the long haul.

There is the perception, among producers and clients alike, that these products are “risk-less” and that you can “set it and forget it,” like one of those horrible infomercial products from RonCo. The truth is that there are risks in these contracts, and when combined with the fact that these risks are largely hidden, they become significant, and warrant discussion.

I was fortunate enough to hear Bobby Samuelson mention NLG contracts and a study recently completed by a major insurance company in an attempt to quantify the magnitude of the problem. What, specifically, were they looking for? In force NLG contracts that are no longer tracking with the original policy issue illustration. The results will surprise you. Not because of the high percentage that are indeed off track, but because of the reason they ended up that way.

First, the reasons: almost exclusively it was due to the timing of premium payments. But that is not the surprise. The surprise is that for a wide selection of carriers, paying the premium early can be as big an issue as paying it late. Bobby has made his article on this available to the public, and I highly recommend reading it here. While you are there, spending some time exploring the rest of his content would be a worthwhile investment of your time.

The real question in all of this is, what do we do about it?

Being aware of the problem is truly the consolation prize, and our clients are going to come to us looking for answers. The first step is to understand why early premiums are an issue, and Bobby’s article covers that in detail. The second, and perhaps more important step, is to identify the carriers with products that are susceptible to this problem. Then it is time to take action.

By action, I mean requesting in force ledgers and premium histories on all of your in force NLG business. That’s right, every one of them. As solid as Bobby’s research is, he makes the point that these are complex instruments, and that while he exercised due care, a carrier’s absence from the list is no guarantee there is not a potential problem there.

The majority of these contracts may turn out to be just fine. For those that are not, we are really in the old "an ounce of prevention is worth a pound of cure" situation, in that making an adjustment now to get back on track will be far less painful than waiting until the lapse notice goes out from the carrier.

Of course, it does not stop there. Policy owners, being human, are going to continue to make mistakes managing their insurance. Premiums will be paid early or late, if not skipped altogether.

It’s our job to monitor these contracts and keep them on the straight and narrow.