Life Insurance Illustration (Terms Explained)

Here in my left hand is a mirror, in my right hand… Smoke.

A life insurance policy “illustration” is a set of projections, prepared by the actuarial department of the insurance company. It shows how your policy will perform over your lifetime. It includes financial projections for each year. If it’s a term policy, the projections extend to when the policy ends. If you chose permanent life insurance, the projections show data that stretches well beyond your 100th birthday.

For term insurance, a policy illustration usually shows at least three things: current and maximum premiums for each year; total premiums paid up to that year; and each year’s death benefits. If your policy has “re-entry” provisions for certain years — requiring you to qualify for the benefits through a physical exam, for example, there are columns telling you the premiums if you passed (“re-entered”) or failed the company’s medical requirements.

Sounds easy, doesn’t it? If you are stopping at term insurance, you are in luck. If not, be prepared for a shocker when you take a look at your first permanent life insurance illustration.

An Illustrative Jungle

Permanent insurance illustrations are complicated enough to make you want to give up the buying process altogether. Obviously, that’s a bad idea because you’ll end up with no insurance at all. The typical term insurance illustration runs two or three pages and contains 100 or so numbers. By comparison, the typical permanent life insurance illustration can run 10 pages with 1,000 numbers. Further complicating this numerical morass: Except for the numbers listed in the “guaranteed” columns, the actual payout for virtually every number you see is bound to be higher or lower than projected.

Why are permanent life insurance illustrations so unreliable? Obviously, the company has to project years into the future, therefore making long-term estimates of its investment success, its expenses, and its mortality charges. These are the numbers that you often don’t see. The numbers that you do see in the illustration, apart from the guaranteed premiums, cash value, and death benefits, are pie-in-the-sky figures.

Many reputable insurance professionals tell their clients to forget the non-guaranteed numbers altogether and to consider them as icing on the cake (the cake being the guaranteed part). The problem is that many other insurance professionals don’t, and they brandish the life insurance illustration as their primary sales weapon in the battle to get your business.

The Phantom Interest Rate

Did you know the illustration software that insurance professionals use allows the insurance professional to change the interest rates? This means they can put any interest rate they want into the projections.

Life insurance professionals often sell particular products by touting the company’s “current interest rates” and “current dividend rates.” It is tempting to just buy the policy with the highest current rate, just to get the buying process over with. The problem is that current rates are usually only guaranteed for three-to-12 months, and some of the life insurance companies with the highest current rates have the most expensive policies in the long run. They have to show potentially high payoffs to attract buyers.

All of the non-guaranteed numbers are based on the company’s best guess about future performance. That task is even harder than trying to estimate an investment’s future performance. The insurance company estimates how well it will invest its portfolio, and also projects its expenses and mortality costs dozens of years into the future.

Making Illustrations Work for You

First and foremost…..compare apples with apples! If, for example, you are receiving illustrations for interest-sensitive policies (universal life), make sure the insurance professional sets the interest rate at the same rate for all life carriers. By the way, set the interest rate at conservative levels!

Second…Ask for Option 1 for the level death benefit and maximum cash value accumulation, or Option 2 for increasing death benefits and use the same “Options” with all illustrations with the different carriers.

Third…If your goal is maximum death benefit at the end of say, year 30, compare the death benefit with each carrier who has the highest? If the goal is maximum cash accumulation and not maximum death benefit compare the surrender values at year 30 for all of the carriers using Option 1 variable.

Ask for the Payoff Projections

When comparing illustrations, you should always ask for projections that show the payoff if current interest rates continue into the future. Then you should ask for a second illustration that shows the payment if the rates drop by two percentage points. It is surprising how much the numbers differ when the scenarios change. This is especially important when comparing policies from two different companies. Go for the policy that looks better at the lower rate. That is probably the more conservative company, and therefore has a better chance of meeting its projections.

Finally, remember that clothes may make the man but illustrations don’t make the company. Illustrations offer only a glimpse into how well a company thinks (or wants you to think) its policy will perform for decades to come. By knowing what illustrations to ask for, how to compare them, and what your insurance professional should do, you will maximize your chances of picking the right one.

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Applications for life insurance on QuickQuote.com are made through QuickQuote Financial, Inc. or through its designated agent, Timothy S. Bain, only where licensed and appointed. License numbers are available here and are automatically provided where required by law. QuickQuote’s National Producer Number is 1927227. Timothy S. Bain is a licensed life insurance agent in 49 states, including the District of Columbia, and his resident state of Nevada. Timothy S. Bain’s Nevada license number is 45949; in California, 0D23811; in Louisiana, 274924; in Massachusetts, 1762164; in Minnesota, 20267005; in Texas, 1092088; and in Utah, 134031.

Case Studies: Exploring the Complexity of Life Insurance Illustrations

Case Study 1: The Term Insurance Dilemma

John is considering purchasing a term life insurance policy to protect his family in case of an unfortunate event. He receives a policy illustration that provides projections of premiums, total premiums paid, and death benefits for each year.

The illustration also highlights re-entry provisions and associated premiums based on medical requirements. John learns that comparing term insurance policies is relatively straightforward compared to permanent life insurance policies.

Case Study 2: The Complexity of Permanent Insurance

Sarah is exploring permanent life insurance options, and she receives a 10-page illustration that contains a multitude of numbers and projections. Unlike term insurance, permanent insurance projections extend beyond her 100th birthday.

Sarah realizes that these illustrations can be overwhelming due to the extensive number of variables involved. She learns that most of the numbers presented, except for the guaranteed columns, are speculative projections and should be considered as non-guaranteed figures.

Case Study 3: The Phantom Interest Rate

David meets with an insurance professional who presents different policies and highlights the current interest rates and dividend rates of each company. However, David soon discovers that these rates are subject to change and may only be guaranteed for a limited period. He realizes that some companies with high current rates may have higher long-term costs.

David understands the importance of considering the company’s stability and conservative assumptions in addition to the illustration numbers.

Case Study 4: Making Informed Comparisons

Emily is determined to make informed decisions when comparing life insurance illustrations. She ensures that when receiving illustrations for interest-sensitive policies, the interest rate remains consistent across all carriers.

Emily asks for two options: one for a level death benefit and maximum cash value accumulation and another for increasing death benefits. By comparing death benefits and surrender values at specific intervals, Emily maximizes her chances of selecting the most suitable policy.

Case Study 5: Projection Scenarios

Mark is careful to evaluate life insurance illustrations by requesting projections based on different interest rate scenarios. He asks for projections assuming current interest rates continue into the future and another set of projections with rates dropping by two percentage points.

Mark recognizes that the numbers can significantly differ based on these scenarios and uses them as a basis for comparison. He understands that selecting a policy that performs well even at lower rates indicates a more conservative and reliable company.

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