How to read a life insurance illustration

A life insurance illustration is a table that projects, year by year, what a permanent policy would cost and what it would be worth under stated assumptions. It is a projection, not a promise. The only numbers the insurer is contractually bound to are in the guaranteed column; everything else depends on dividends, interest credits or charges the company can change. Read the guaranteed column first, then ask what has to happen for the rest to come true.

Illustrations matter most for whole life, universal life and indexed universal life. A level-premium term policy has little to project beyond the premium and the death benefit.

The rules behind the page

Most states have adopted some version of the NAIC Life Insurance Illustrations Model Regulation (#582), which sets standards for how illustrations are prepared and presented. The model covers individual and group life policies, with exceptions for variable life, annuities, credit life and policies whose illustrated death benefit never exceeds $10,000 (variable life is governed by securities rules; see variable life insurance and the securities rules that govern it). Key points, taken from the model regulation:

• Disciplined and currently payable scales. Illustrated non-guaranteed elements may not exceed the lesser of the insurer's "disciplined current scale", a limit based on recent actual experience and certified yearly by an illustration actuary, and its currently payable scale, meaning what is in effect or declared to take effect within 95 days.
• A narrative summary and a numeric summary. The numeric summary must show death benefits, values and premiums for at least policy years 5, 10 and 20 and at age 70, on three bases: policy guarantees, the insurer's illustrated scale, and a middle scenario.
• Year-by-year detail. A ledger shows each year from 1 to 10, then every fifth year to age 100 or policy maturity.
• Signatures. The applicant signs that non-guaranteed elements "are subject to change and could be either higher or lower", and the producer certifies that the illustration was explained and that nothing inconsistent was said.
• A revised illustration must be signed at delivery if the policy is issued on terms different from those applied for.
• Prohibited practices. Producers may not use "vanish" or "vanishing premium" language to describe paying future premiums from non-guaranteed values, and may not use a "lapse-supported" illustration for policies that build cash value.
• Annual report and in-force illustrations. The insurer must send an annual status report and, on request, an in-force illustration at no signature requirement (see how to request and read an in-force illustration).

Illustrated indexed policies have additional limits on the rate that can be shown; see IUL illustrations and Actuarial Guideline 49.

The three columns

The midpoint case, which the model requires in the numeric summary, is the most underused. If a policy only works in the current column, the plan depends on assumptions that may not hold for decades.

What to look at, in order

1. Premium outlay. Is it a required contract premium or an assumed payment? A flexible policy may show payments that stop on some date while the policy remains in force only if non-guaranteed values hold. If a premium is due, the outlay column should not be blank without an asterisk explaining the policy is not paid up.
2. Guaranteed death benefit and cash value. Check the year the guaranteed coverage ends, if it does. A universal life policy that guarantees coverage only to age 90 may lapse before you do.
3. Year of break-even. The year the guaranteed or non-guaranteed cash surrender value first exceeds the premiums you have paid. Many permanent policies show low or zero value in the early years because of acquisition costs and surrender charges.
4. The assumed rate. Look for the dividend interest rate (whole life) or the crediting rate (universal life). Compare it with the rates credited today; for an indexed policy, see the cap and participation assumptions in IUL caps, participation rates and floors.
5. Loans and withdrawals. If the illustration shows tax-free income, find the loan interest rate assumed and confirm the policy stays in force through the end of the table (see life insurance policy loans: how they work and what they risk).
6. Riders and fees. Each should be listed. Check fees and charges inside permanent life insurance if charges are not clear.
7. Signatures and dates. Confirm the illustration is the one that matches the application, and keep the signed copy.

A hypothetical example

Say an illustration for a permanent policy shows an annual premium of $12,000 for 10 years. In year 20, the current column shows a cash value of $260,000, the midpoint $190,000 and the guaranteed column $140,000. This does not mean the policy "earns" $260,000. It means that if the insurer's current assumptions continued unchanged, the number is $260,000, and the guarantee in the contract is $140,000. A reader who expects the policy to support loans or retirement income should check that the plan still works at the midpoint number. This example is invented to show how to read the table, not to suggest typical values.

Questions to ask the agent

• How have the dividend or crediting rates changed over the past ten years for this policy form?
• At what premium would the guaranteed column keep the policy in force for life?
• What happens in the current and midpoint columns if I stop paying after year 10?
• Which items are guaranteed, and which can change? (See guaranteed vs non-guaranteed values in a policy illustration.)
• If I replace an existing policy with this one, what do I give up? (See replacing a life insurance policy: when it makes sense.)

Key takeaways

• An illustration is a projection; only the guaranteed column is a contractual promise.
• Under the NAIC model, the numeric summary shows guaranteed, illustrated and midpoint cases at years 5, 10 and 20 and age 70.
• Look first at when guaranteed coverage ends and whether the plan holds at the midpoint.
• Signed illustrations matter: keep the one that matches your application.
• Request an in-force illustration every year or two to see how the policy is actually performing.