Guaranteed vs non-guaranteed values in a policy illustration

Guaranteed values are the minimums the insurer is contractually bound to deliver, assuming you pay premiums as scheduled. Non-guaranteed values are projections of things the insurer controls and may change, such as dividends, interest credited and the cost of insurance charges. An illustration usually shows both, and the gap between them is the part of the sales pitch that depends on the future going well.

The two columns

A typical illustration shows year-by-year figures for premium, cash value and death benefit under up to three scenarios:

The policy illustration is regulated: under the NAIC's life insurance illustrations model regulation, which states have adopted in some form, an illustration must show guaranteed and non-guaranteed elements separately and be signed by the applicant and the agent. Your state's rules may differ. See how to read a life insurance illustration for a column-by-column walkthrough.

What is guaranteed, and what is not

Guaranteed in the contract:

• The death benefit, as long as premiums are paid when due
• The level premium on traditional whole life
• A minimum cash value schedule, listed in the policy
• The maximum charges and minimum interest rate on universal life
• Nonforfeiture values if you stop paying; see nonforfeiture options: reduced paid-up and extended term

Not guaranteed (the non-guaranteed elements):

• Dividends on participating policies, set each year by the insurer's board
• The current crediting rate on universal and indexed products
• Actual cost of insurance charges, which can be raised up to the contractual maximum
• Index caps, participation rates and spreads on indexed policies
• Policy loan rates if they are variable

A guarantee is also only as strong as the insurer behind it. If an insurer fails, guaranty association limits apply. See state life and health guaranty associations.

Why the gap matters

The non-guaranteed column often looks far better than the guaranteed one, and the difference grows with time. In participating whole life, the gap is dividends; in universal life, it can be the difference between today's charges and maximum charges. Neither side is dishonest. The guaranteed column is conservative by design, and mutual insurers have historically paid dividends for decades. But the illustrated column assumes the insurer's current scale continues for 30 or 40 years. Interest rates, mortality, lapses and expenses all move. An insurer can, and sometimes does, lower its scale. See whole life dividends: how participating policies pay.

The danger is not just disappointment. In universal life especially, a policy funded to "work" only under the illustrated assumptions can run out of cash value and lapse if the real numbers fall short. See why universal life policies lapse, and how to prevent it and universal life cost-of-insurance increases and what to do.

How to stress-test an illustration

1. Start with the guaranteed column. Ask whether you would still buy the policy if only those numbers came true. If the premium is only affordable under the illustrated numbers, that is a warning sign.
2. Find the break-even year on guaranteed values: the first year cash surrender value equals total premiums paid.
3. Ask for a reduced-dividend or lower-rate scenario. Many insurers will run the policy at a lower dividend scale or interest rate, such as one or two percentage points below current. See how much the cash value and the premium schedule change.
4. Check what the illustration assumes about premiums. An illustration that shows premiums stopping after a "vanishing" period is a projection, not a promise.
5. Look at the insurer's history, such as its dividend scale changes over the past decade, which is information the company can provide and which is usually published in its own materials.
6. Compare apples to apples. Two illustrations with different assumptions cannot be compared by their bottom lines. Compare guaranteed columns to each other, and illustrated columns to each other.
7. Keep the illustration with the application. You will sign it, and it can matter later if the policy underperforms.

A hypothetical example

Say a whole life illustration shows, for year 20, a guaranteed cash value of $60,000 and an illustrated cash value of $85,000. The $25,000 difference depends on dividends. If the insurer lowers its dividend scale, the actual figure might land anywhere between the two, though it can be above the illustrated figure if experience improves. Ask: what happens to my plan if the real value is $60,000? If the answer is "I can't afford to keep it" or "my retirement plan fails," the policy is carrying more risk than the headline suggests. These numbers are invented for illustration.

Once you own the policy

Ask for an how to request and read an in-force illustration every year or two. It re-runs the policy using your actual cash value, loans and the insurer's current scale, and shows what future premiums or performance are required to keep it intact. A yearly check is cheap protection against a drifting policy. The annual life insurance policy review checklist helps organize it.

Key takeaways

• Guaranteed values are contractual minimums; non-guaranteed values are projections the insurer can change.
• Dividends, crediting rates, charges below the maximum and index caps are the main non-guaranteed elements.
• Judge a policy first on its guaranteed column, then ask for a lower-scenario run to see how fragile the plan is.
• Never compare two policies by their illustrated bottom lines alone; use the same assumptions.
• After you buy, request an in-force illustration regularly and act early if the numbers drift.