No-lapse policies pose risk: indiscriminate sales of no-lapse policies could be damaging to the reputation of life insurers.

Concerns about the marketing of no-lapse universal life policies have been rising, with critics warning that many prospects are being shown only no-lapse products even when their situation suggests that a different policy design may be in order. Could no-lapse products become the next vanishing premium debacle/or the life industry, raising the specter of lawsuits and damaging allegations regarding the insurance sales process?

While there are many circumstances where a no-lapse product is suitable for an insured, we see a disturbing parallel between the current-day presentation of no-lapse products and the sale of vanishing premium products in years past. Each represents an easy sale. In the case of vanishing-premium products, the sale was facilitated by showing the prospect an illustration under which the total number of premium payments was reduced. However, too often the buyer wasn't told that for many reasons, it was pure conjecture as to when (or if) premiums would vanish as promised. When that failed to happen, policyholders cried foul.

Today, the apparent low cost of no-lapse UL relative to a traditional whole life product enables the agent to more easily overcome the buyer's objection to the cost of a death benefit that is guaranteed for the buyer's whole life. And, at least at the superficial level, no-lapse UL calls for fewer what-ifs than its siblings: current-assumption universal life or variable universal life. With these current-assumption products, the premium may be affected either by interest-crediting rates or market returns, which is a harder concept for the agent to explain.

In their eagerness to make a sale, however, many agents fail to point out that no-lapse products require a certain premium to support the guaranteed death benefit and that they generate far less cash value than current-assumption products. Also, unlike current-assumption products, they have no potential for a lower premium or higher death benefit if interest rates rise, and could lose their guarantees once the insured withdraws or borrows cash value.

The complaint about vanishing-premium products was that the buyer ended up paying more premiums than originally forecast. But typically, there was no allegation that the product itself was unsuitable for the buyer. With the no-lapse product, in contrast, buyers could claim not only that they were sold the wrong type of policy for their needs, but that they were never clearly told how the policy really worked.

Buyers should be shown that by choosing the no-lapse policy over the current-assumption product, they may be giving away upside in the form of an eventually higher death benefit or cash value. Also, do buyers of a no-lapse product really understand the implications of making a late premium payment, taking a policy loan, or trying to use a catch-up provision? It's the buyer's choice, but the agent should make sure it's an informed choice.

The drumbeat about no-lapse products is only likely to become hinder. If a carrier is to help agents make sales that will stay on the books instead of becoming tomorrow's legal hassles, the carrier should ensure that the sales record reflects that the product was suitable for, and understood by, the buyer.

One approach would be to use some form of questionnaire, much like the one a registered representative must use when establishing a new account for an investment client. The form might ask questions such as what the purpose of the coverage is, whether the buyer anticipates needing it for the rest of his or her life, whether he or she needs flexibility of premium payments, expects to take policy loans, and so forth.

Another approach would be to include some "plain English" in the policy illustration or in a separate document, signed by the insured, stating that the guarantee will not be effective if premiums are not paid in timely fashion, if cash is withdrawn or borrowed, and if other clearly identified requirements are not met.

Finally no-lapse illustrations should advise buyers to look at current-assumption products as well because, as a trade-off for the guarantee, those products may provide a greater death benefit under acceptable assumptions, allow more premium flexibility and build greater cash value.

The marketplace is just too competitive, and the environment too litigious, to leave agents and carriers exposed to the nobody-told-me charge. Some simple steps such as those suggested here might go a long way toward mitigating those risks.

Robert W. Stein, a Best's Review columnist is chairman of Global Financial Services for Ernst & Young. He may be reached at [e-mail].