Calculate reserves for no-lapse guarantees.

A Universal Life policy normally terminates when the account value hits zero. A no-lapse guarantee (NLG) overrides that: as long as the policyholder satisfies a premium test, coverage stays in force even when the account value collapses. That guarantee has positive value to the insured and a reserve has to be held for it.

Strip the contract to its essentials. The policyholder pays flexible premiums. The insurer credits interest, deducts the cost of insurance (COI), and deducts expense charges from an account value (AV). Without an NLG, if AV ever falls to zero (after grace), the policy lapses. With an NLG, the death benefit stays in force through the guarantee period (often to age 100 or for life) provided the policyholder has paid at least the minimum NLG premium schedule.

KEY: The NLG is a contractual override on the lapse rule. It does not change the death benefit, the COI, or the credited rate. It only changes the lapse trigger.

Common mistakes

• Using guarantee-basis interest in the reserve. The shadow account uses $i^{SA}$ to determine $G$. The reserve must discount at the valuation rate $i$. Mixing them mis-sizes the reserve.
• Ignoring the maximum. Reporting only the NLG reserve and forgetting ${}_{t}V=\max ({}_t{V}^{AV},{}_t{V}^{NLG})$. When AV is large, the AV reserve wins and the NLG reserve is moot.
• Assuming the policyholder pays current premium, not $G$. The reserve projection presumes the rational behavior of paying exactly the minimum guarantee premium. Anything higher reduces the NLG reserve; anything lower breaks the guarantee.

Bottom line

• An NLG keeps a UL contract in force past account-value exhaustion, overriding the normal lapse rule, as long as a premium test is satisfied.
• Two test designs dominate: a cumulative premium test compares paid premiums to a stipulated schedule, while a shadow account tracks a virtual fund using guarantee-basis credits and charges.
• The minimum guarantee premium $G$ is the level premium that drives the shadow account to zero at the end of the guarantee period.
• The NLG reserve equals EPV future benefits plus expenses minus EPV future $G$ payments, projected on valuation assumptions, assuming the policyholder pays exactly the minimum needed to maintain the guarantee.

Exam shortcut

When the contract states AV = 0 and the NLG is in force, jump straight to the term-insurance shortcut $F{A}_{x+t:\overline{n-t|}}^1-G{\ddot{a}}_{x+t:\overline{n-t|}}$. It saves four lines of cash-flow projection. DECISION: Question asks for the reserve held → compute both ${}_t{V}^{AV}$ and ${}_t{V}^{NLG}$, take the max. Question asks for the NLG reserve specifically → compute only the EPV projection.

The full lesson (about 2,425 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.

Learning objectives

• 6b

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