Overloan Protection Riders

An overloan protection rider (OLP) is a product feature designed to help life insurance policyowners manage policy loan balances to avoid an inadvertent lapse and the associated taxable “boot.” When the outstanding loan is in excess of 90% of the policy account value, utilizing OLP may be a valuable alternative to self-managing a policy.

Understanding how OLP works and its variations is key to unlocking the value it provides and can help you protect your clients’ interests.

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Why It Matters

One of the valuable benefits of life insurance is using the savings aspect to accumulate cash value over an individual’s working years. As the individual enters retirement, a popular strategy is to use accumulated cash values to supplement retirement income through a systematic program of withdrawals and loans. 

Outstanding policy loans must eventually be paid back. Many policyowners plan to pay back the loan at death, by netting the outstanding loan balance against death proceeds. If a policy is surrendered or lapses prior to death, the total outstanding loan balance is considered a distribution of account value at the time of termination and becomes taxable to the extent it exceeds the policy’s cost basis. This distribution of the outstanding policy loan balance is commonly referred to as boot, as the owner receives taxable value when the outstanding loan balance is functionally extinguished.

Member Firms may want to adopt best practices for utilizing OLP when servicing policies with large outstanding loan balances to mitigate liability exposure for policy management.  

How Does OLP Work?

When a policy has a loan and the loan balance grows beyond a set percentage of the policy’s account value, the OLP is exercised. At exercise, a one-time rider charge is applied that covers all future policy charges, including cost of insurance and expense charges. This essentially puts the policy into a “paid up” status, and the policy continues in force until the death proceeds are paid. Once the OLP has been exercised, no further policy transactions are allowed (e.g., premiums, loans, and withdrawals).

On the surface, OLP appears straightforward. However, carrier variations in the mechanics, exercise conditions, and features of OLP can make illustration, comparisons across carriers, and utilization of OLP challenging.

General Summary of Carrier OLP Exercise Conditions

The following table demonstrates how illustrated values could be impacted by the utilization of an OLP. This example is based on an initial guideline premium test (GPT) policy where the face amount is $500,000 and funded at a level to be in the cash value corridor when distributions of withdrawals and loans start at age 65. The example shows how the OLP rider may work when it triggers, in this case at attained age 80.  

At exercise, there is a one-time charge of $26,500 to the unloaned account value to trigger the rider. After the OLP is exercised, the unloaned account value goes to zero, but the policy remains in force with a modest death benefit. This policyholder will not be able to take additional loans or withdrawals for the policy; however, they are no longer at risk of taxable boot. Note that other benefits, such as LTC riders, will typically be terminated with exercise of the OLP.

The main benefit of OLP is to remove the burden of managing a heavily loaned policy. Had the OLP not been exercised in this scenario, the account value would need to be carefully monitored to ensure the policy does not inadvertently lapse. It is possible through monitoring to keep the policy in force, in part by mimicking the OLP feature, such as by stopping future loans, moving money to the fixed account, and frequently monitoring the account value.

Best Practices for OLP

Recommended Features of OLP Riders

Illustrating an OLP

There is a wide variation among the carriers’ illustration capabilities to demonstrate OLP. Here are some tips to make the OLP show up in an illustration:

Issue and Policy Servicing

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