Understanding Life Insurance: Decoding Your Policy Illustration

Life insurance illustrations are documents provided by insurance companies to outline the details of a life insurance policy to potential policyholders. They are designed to help individuals understand how the policy works, its benefits, and how premiums are structured. These illustrations are not simple charts or pictures, but rather complex hypothetical ledgers that can span up to 15-20 pages. They outline the expected costs and benefits of the policy, based on assumptions about the policyholder and macroeconomic forecasts such as interest rates. While these illustrations are helpful tools, it's important to remember that they are not guarantees of future performance, and actual policy results may vary.

What is a life insurance illustration?

A life insurance illustration is a document provided by an insurance company that outlines the details of a life insurance policy to potential policyholders. It helps them understand how the policy works, its benefits, and how premiums are structured. Life insurance illustrations are not simple charts or pictures, but instead, they are complex hypothetical ledgers that can be up to 15-20 pages long. They are used to inform potential policyholders and help insurance agents in their sales process.

Life insurance illustrations are based on a set of assumptions about future economic and market conditions, such as interest rates, expenses, and mortality rates. They are used to show how a prospective insurance policy will perform over the course of its coverage under many different circumstances and outcomes. The illustration will depict expected costs and benefits related to the policy, which are based on assumptions about the policyholder and macroeconomic forecasts.

The term "life insurance illustration" can be a bit confusing as it does not refer to a simple chart or picture. These illustrations are complex and can be challenging to understand, even for professionals. It is important to interpret them correctly and seek guidance from a financial professional if needed.

How to read a life insurance illustration

A life insurance illustration is a document that outlines a policy's details to help potential policyholders understand how it works, its benefits, and how premiums are structured. While it is a helpful tool, it is not a guarantee of future performance.

Here's how to read a life insurance illustration:

Check Your Variables

The first few pages of the illustration contain an explanation of the coverage, terms, and definitions. Check that your personal information, such as your rating, age, and payment plan, is correct. Also, verify any riders, the premium, and the type of death benefit. There should also be an explanation of the policy's fees, expenses, and interest or dividend rates.

Read the Ledger or Table

Look for a ledger or table, usually on or near the page requiring your signature. These ledgers, labelled "guaranteed" and "nonguaranteed", illustrate how the policy could perform under different scenarios in five-year increments. The "guaranteed" column shows a worst-case scenario, while the "nonguaranteed" column includes two ledgers, "current" or "illustrated" (a best-case scenario) and "midpoint" (the most likely scenario).

Examine the Rate of Return Assumptions

Consider your risk tolerance and the expected rate of return. If the nonguaranteed ledger shows an aggressive return, and the actual return is lower, the policy could lapse prematurely or require a higher premium payment. Remember, the proposed premium is a suggestion, and you can pay a higher or lower premium in most policies.

Other Tips

• There is no right or wrong way to read a policy illustration, and the information may vary depending on the policy type and carrier.
• Federal and state regulations mandate that policy illustrations be submitted in their entirety to a client.
• Illustrations are subject to regulations to ensure they provide accurate and transparent information.

Key elements of a life insurance illustration

A life insurance illustration is a document provided by an insurance company that outlines the details of a life insurance policy to potential policyholders. While it is a helpful tool for understanding the policy, it is not a guarantee of future performance. Here are the key elements of a life insurance illustration:

Policy Information

This includes the type of life insurance (e.g. term, whole life, universal life) and the policyholder's age and health-related information.

Premiums

The illustration will show the amount and frequency of premium payments required to keep the policy in force.

Death Benefit

This outlines the amount that will be paid to the beneficiary upon the policyholder's death.

Cash Value

If the policy has a cash value component, the illustration will project how the cash value can grow over time.

Guaranteed and Non-Guaranteed Values

Some insurance products have guaranteed minimum values, while others have non-guaranteed elements like dividends or interest rates. The illustration should differentiate between these and provide projections for both.

Policy Loans and Withdrawals

If the policy allows for loans or withdrawals against the cash value, the illustration may show how these transactions would affect the policy's performance.

Policy Riders

Any additional features or riders attached to the policy, such as a disability rider or a long-term care rider, will be described in the illustration.

Policy Exclusions and Limitations

The illustration will typically mention any conditions or exclusions that apply to the policy, such as contestability periods.

Inflation and Interest Rate Assumptions

The illustration may make assumptions about future inflation rates and interest rates to create projections that can impact the policy's performance.

How are life insurance illustrations created?

Life insurance illustrations are created using specialised software provided by insurance companies. The process begins with an insurance advisor or agent gathering information from the client, including their age, gender, health status, and desired coverage amount. The advisor then selects an appropriate life insurance policy type (e.g. term, whole life, or universal life) based on the client's preferences and needs.

The illustration software then uses a set of assumptions to project future policy values. These assumptions are provided by the insurance company and may include interest rates, dividend rates, mortality rates, expense charges, and administrative fees. These assumptions are typically based on historical data and current market conditions.

The agent enters various variables into the software, including the client's age, health rating, family medical history, payment plan, and the assumed rate of return. The software then calculates the cost of insurance, policy charges, expenses, riders, and a planned or target premium.

The resulting illustration is a document that can be up to 15-20 pages long and contains complex text, tables, and ledgers. It outlines the details of the life insurance policy, including the benefits, premiums, death benefit, cash value, policy loans, withdrawals, riders, exclusions, and limitations. The illustration also includes projections of how the policy is expected to perform over its coverage period, based on the assumptions provided.

It is important to note that a life insurance illustration is not a guarantee of future performance. The projections are based on assumptions that may not hold true, and actual policy results can vary. Therefore, it is crucial to interpret the illustration correctly and seek guidance from a financial professional.

How to request an in-force illustration

An in-force illustration is a vital tool to help you understand the potential future performance of your permanent life insurance policy. It is the only way to monitor the variables that impact your policy's performance and to determine if changes are needed.

To request an in-force illustration, you can contact your insurance agent or reach out to your insurance company directly. The request can be made over the phone, in writing, or through a customer portal if your insurance company offers one. Remember that the request must be made by the policy owner.

When making the request, you should ask for different scenarios to be included in the in-force illustration. These scenarios should be based on the current earnings rate, mortality, and expense charges. Here are some examples of scenarios you can request:

• As-is: Request a projection based on your current premium payments remaining the same.
• Calculate the premium: Ask for a calculation of the premium required to endow the policy at maturity.
• Policy loan: If you have taken out a loan against your policy, request projections for paying off the loan, continuing the loan while paying interest, or borrowing future premiums and loan interest to cover premium payments.
• Other scenarios: Consider any other changes you are thinking of making to your policy, such as changing the dividend option, taking out a loan, or making a partial cash value withdrawal.

According to the National Association of Insurance Commissioners Life Insurance Illustrations Model Regulation (model #582), insurance companies are required to provide an in-force illustration of current and future benefits and values based on their current illustrated scale. As a policy owner, you are entitled to request an in-force illustration annually and should receive it within 30 days of your request.

Frequently asked questions