Life Insurance Illustrations: Everything You Need to Know

You’ve decided to buy a permanent life policy and now what? If you’re thinking, “Well, I’m going to my agent/broker and I’ll just buy it,” we have to stop you there.

When you make your decision, you should ask your insurance agent or broker to share life insurance illustrations with you to help you better understand the terms and which type of permanent life insurance policy is best for you.

Let’s talk about life insurance policy illustrations in greater detail.

Table of Contents

    Life Insurance Illustration: Understand the Basics

    Life insurance illustration can be a little confusing because we often associate “illustration” with some type of chart or picture, and this is not it.

    Then, what is the life insurance illustration?

    Life insurance illustrations are hypothetical ledgers that show precisely how your policy might perform under various circumstances and outcomes.

    These illustrations can have up to 20 pages of complicated text, but they still have to follow a general format and the rules set by regulators. Despite the standardized format, life insurance illustrations can be tricky to understand, even for professionals.

    Insurance agents create these illustrations by plugging many different variables into a software program developed by the insurer. Some of the necessary variables are the insured’s age, the results of a medical exam, and a family medical history. Other variables include your payment plan, the rate of return you expect, and your age when the policy will end.

    Based on these variables, the software will calculate your:

    • Life insurance cost;
    • Policy charges;
    • Expenses;
    • Riders;
    • Planned or target premiums.

    What Does A Life Insurance Illustration Look Like?

    A life insurance illustration typically includes several elements:

    • Policy Information: This section provides details about the life insurance policy being illustrated, such as the type of policy, face amount, and premium payment period.
    • Guaranteed and Non-Guaranteed Elements: This section shows the guaranteed and non-guaranteed components of the policy. Guaranteed elements are those that the insurer promises to provide, such as a death benefit or a minimum interest rate. Non-guaranteed elements are those that may vary over time, such as dividends or interest rates.
    • Assumptions: Life insurance illustrations are based on a set of assumptions about future economic and market conditions. These assumptions can include interest rates, expenses, mortality rates, and others.
    • Benefit Projections: This section shows how the policy’s benefits are projected to perform over time based on the assumptions and the policy’s design. Benefit projections can include the death benefit, cash value, and other policy features.

    What Are Life Insurance Illustrations Used For?

    An insurance illustration actuary makes a set of projections that can be called a life insurance illustration. The document helps clients understand their financial future by showing what the policy or money invested will do over time. It is used to figure out how much money will come into and go out of the life insurance policy each year until maturity.

    But bear in mind that the projections outlined in the benefit illustration are based only on assumptions. It’s important to note that it doesn’t guarantee that the life insurance policy will perform exactly as the illustrations say—except for the elements marked as “guaranteed.”

    In the USA, all illustrations for life insurance must be approved by the National Association of Insurance Commissioners (NAIC). The goal of insurance examples is to protect customers by helping them learn more about life insurance policies and how they work. 

    The NAIC’s model regulation for life insurance illustration applies to all individual and group life insurance policies and certificates that show an illustration of a death benefit of more than $10,000.

    Basic Illustration

    Basic illustrations are used for marketing the life insurance policy, displaying guaranteed and non-guaranteed elements. The policy’s benefits, premium payments, interest credits, and policy values at the time the policy was issued are all things that are guaranteed. On the other hand, non-guaranteed elements are those that are not determined at the time of the dispute. 

    For example, let’s take universal life insurance. The parts of the policy that are not guaranteed are the current death benefits, the guaranteed values, the premiums, and the accumulation of funds related to the current benefits. 

    Supplemental Illustrations

    A supplemental illustration is a type of illustration that works along with a basic illustration to meet the needs of the rule. A supplemental illustration depicts the scale of non-illustrated elements permitted in basic illustration. However, the format of both illustrations may differ.

    The supplemental illustrations must tell the policy owner to look at the basic illustration to learn more about the current scale, guaranteed things, and other important information. The illustrations are also considered self-supporting financial documents. 

    In-force Illustrations

    Sometimes, the policy owner requests policy updates to understand the policy’s performance after one year from the policy’s effective date. In this case, the life insurance company issues these updates as in-force illustrations. Like the basic illustration, the in-force illustration shows the insured’s age, the age at which the policy was issued, and the number of years until the policy starts. 

    Basically, the in-force illustration gives an estimate of how the cash value of the life insurance policy will change over time. It lets you know if your life insurance policy is healthy or warns you well in time if your policy needs more funding. This is also the most common type of illustration.

    How to Request In-Force Illustrations?

    You can request your in-force illustration in two ways: through your life insurance agent or from your life insurance company.

    Either way, you can request it over the phone or in writing. Some insurance companies have a customer portal that policyholders can use to ask for the in-force illustration. The most important thing for you to know is that only the policy owner can make this request.

    Based on the mortality rate, the current earnings rate, and the expense charges, you should include the following in your request:

    • As is, based on your current premium payments remaining the same;
    • Calculate the premium required to endow the policy at maturity;
    • If you have a policy loan, request the following scenarios: paying off the loan, continuing the loan while paying interest out of pocket, and borrowing future premiums and loan interest to pay the premiums.
    • Other scenario(s) you can consider may include changing the dividend option, taking out a loan, or taking a partial cash value withdrawal.

    Sometimes it happens that the life insurance company says they cannot give you an in-force illustration. But keep in mind that life insurance companies must provide these illustrations of current and future benefits and values based on the insurer’s current illustrated scale, which shows current premiums, insurance costs, earning rate, and expense charges. 

    The National Association of Insurance Commissioners’ Life Insurance Illustrations Model Regulation (Model #582) says that insurance companies have to give you in-force illustrations. Policyholders can ask for an in-force illustration once a year, and they should get it within 30 days of making the request.

    How to Read Life Insurance Illustrations

    Reading your life insurance illustration will be easier if you follow these three reading stages.

    1.Check Your Variables 

    In the first few pages of the illustration, you will find an explanation of the life insurance coverage, terms, and definitions. But illustrations will differ depending on the company and type of coverage. 

    As you look through the pages, you should first verify that all the information is correct. Check that there is no mistake in your rating, age, or payment plan. On top of that, check any riders that are part of the policy, the premium, and if the policy has a level of increasing death benefit, usually called option 1 or 2.

    For example, a policy with a level death benefit of $250,000 and a $25,000 cash value will pay out only $250,000. But a policy with an increasing death benefit of $250,000 and a $25,000 cash value would pay $275,000. So, the numbers in the illustration will also vary depending on the type of death benefit.

    There should also be a description of the policy’s current and maximum costs and fees, as well as its current and guaranteed minimum interest or dividend rates. It’s necessary to check that all the variables are correct because contractually guaranteed items, such as your age or rating, can’t change once the company issues the policy. However, the insurer can adjust fees and crediting rates. These changes don’t affect no-lapse life insurance policies because the insurer takes on any interest rate risk or policy cost increases and guarantees. If you pay the premium on schedule, the policy will stay in force until a set age. And in exchange, the life insurance policies will build cash value.  

    2. Read the Ledger or Table

    The next thing you should pay attention to is a ledger or table. It is usually on or near the page with the request for the signature. Based on the planned premium, these “guaranteed” and “non-guaranteed” ledgers show, in five-year increments, how the policy could perform in different situations.

    The guaranteed column (a worst-case scenario) shows how long the policy would stay active if the insurance company charged the maximum fees and paid the minimum interest rate or dividend crediting rate. Often, the policy lapses long before the expected mortality, and to keep it active, the insured person must pay a significantly higher premium.

    The non-guaranteed column may include two ledgers, also called “current” or “illustrated” and “midpoint.” Using the proposed premium, the current ledger (a best-case scenario) shows the death benefit and how much cash value the policy could build based on the current policy fees and a high assumed interest rate or dividend crediting rate.

    The midpoint ledger (the most likely scenario) depicts how the policy would perform if the policy fees remained constant but the interest or dividend rate fluctuated between the current and guaranteed rates. The assumed rate of return is usually shown at the top of each ledger column.

    The illustration will also have many pages of detailed ledgers showing the guaranteed and nonguaranteed values year by year and extra reports showing policy fees and expenses.

    3. Examine the Rate of Return Assumptions

    When looking at the ledgers, it’s essential to consider how comfortable you are with risk and the rate of return you expect. Each permanent life insurance product doesn’t have “rates of return” like a whole life insurance policy. For example, if the non-guaranteed ledger shows an aggressive return, variable life insurance policies often assume a 7-8% return after fees and expenses. If the actual return is less, the policy could end early, or you may have to pay a much higher premium in the future. 

    Don’t forget that the proposed premium is just a suggested payment based on the assumptions in the illustration. Most life insurance policies allow you to pay a higher or lower premium (except for no-lapse guarantees and whole life policies).

    Bring Your Life Insurance to the Next Level

    Life insurance illustrations are essential for understanding what you will get with your life insurance policy. But did you know that you can improve the results of your life insurance policy when it’s designed properly?

    Sounds intriguing, right? Well, here is how you can do that.

    First things first, the process we will explain only works if you have a whole life insurance policy. If you want to learn more about why that is and the difference between term and whole life insurance, check out our previous blogs.

    Once you set up your whole life insurance policy, you can take it to the next level with the process of Lifestyle Banking.

    It is the financial strategy of utilizing your whole life insurance policy to generate cash value that you can use to finance your own lifestyle. 

    Are you familiar with Infinite Banking? It’s a similar concept, but with one huge difference: with Lifestyle Banking you’re learning the psychology of money and not only how to move money.

    Why is that important?

    Because you can’t be truly wealthy if you don’t have the right mindset. Only being wealth conscious allows you to make the right financial decisions and take ownership of your life. 

    The traditional banking system teaches us that we’re not in control of the money and must fit in the box they’ve made. But that couldn’t be further from the truth.

    YOU ARE IN CONTROL. And we can teach you how to get out of debt and create a cash flow doing the same things you’re doing now. You don’t have to change your lifestyle to become wealthy; you just have to make small adjustments to your mindset and strategy.