What is a No-lapse Guarantee Rider?
Life insurance lapses
When you buy a life insurance policy, you enter into an agreement with the insurer. The policy contract stipulates that they will pay out the policy benefit to your beneficiaries when you pass away, assuming the policy is in force at the time of your death.
That last bit matters. You can’t buy life insurance and assume it will stay in effect without further action from you. In order to keep your policy’s protection in place, you need to pay the associated premiums. If you don’t, your policy lapses. At that point, the policy contract becomes null and void. After a policy lapse, your beneficiaries can’t expect anything from the insurer when you pass away.
A missed premium isn’t the only way for a life insurance policy to lapse, though. If you have a permanent policy, it likely includes a cash value component. While that can provide an added benefit, it also presents a risk. If that cash value reaches zero, your policy will lapse.
That risk becomes amplified if you have a universal life insurance policy, which allows you to apply your cash value toward premium payments that you miss. While this can help you keep your policy in force if your budget gets tight, it whittles away at your cash value over time. If that amount hits zero, your insurer will void your policy — assuming you don’t have a no-lapse guarantee rider in place.
How no-lapse guarantee riders work
These riders, or optional policy add-ons, can be tricky to understand because the name suggests that they protect you from policy lapses in general. That’s actually not the case.
Instead, no-lapses guarantee riders are designed to prevent policy lapses that would otherwise occur if the cash value in a universal life policy reaches zero.
The catch is that in order to avoid a cash value-related policy lapse, the onus is on you to avoid a missed premium-related lapse. In other words, this rider only works if you continually make your premium payments on time.
Still, though, a no-lapse guarantee rider usually doesn’t add very much cost to your universal life insurance policy and it can protect you from an unwelcome situation if you use up all of your cash value. This rider isn’t right for everyone, but it can offer protection if you’re worried that the flexibility that comes with your universal coverage could come back to haunt you.