What you need to know about life insurance illustrations
Originally posted on: iQuanti.com
Life insurance illustrations are documents provided to prospective policyholders by their life insurance agents when they’re shopping for life insurance quotes. These are created to show what the policy includes and how it is expected to perform. Life insurance illustrations are used for permanent life insurance, not term life insurance, so they also show projected cash value.
How life insurance illustrations are created
Insurance agents create life insurance illustrations by plugging a series of variables into software developed specifically for the life insurance industry. The software then taps into actuarial tables and uses algorithms to create the visual that prospects need to evaluate whole life insurance policies. The variables the agent will need for this are:
- Age of the insured
- Medical exam results
- Family medical history
- Payment plan
- Expected rate of return
- Maturity date (when the policy ends)
When shopping for life insurance, you’ll be asked a series of questions to help the agent create the life insurance illustration. Once the data is in, the computer can generate multiple illustrations to compare different policies to find the one that best suits your needs.
How to read a life insurance illustration
At first glance, a life insurance illustration could confuse the average consumer. Look for fields that display the cost of the life insurance, policy charges, expenses, riders, and target premiums. These items should be displayed in the first few pages.
Below are some other sections to look for in your illustration:
- Policy information: The details of policy information include the type of policy, face amount, and premium payment period, including due dates.
- Guaranteed and non-guaranteed: The guarantees of a life insurance policy include the death benefit and other components such as minimum interest rate. Non-guaranteed items are the variable components like dividends and interest rates above the minimum.
- Assumptions: Permanent life insurance policies can be in effect for decades, so the insurance company needs to make certain assumptions of risk to calculate returns. The assumptions page outlines the methods used to make these assumptions.
- Benefit projections: Using their assumptions, the insurance company can calculate your projected benefits over the life of the policy.
Types of life insurance illustrations
Life insurance illustrations aren’t just for new policyholders or prospects. They’re useful at any stage of the policy or when economic circumstances drastically change. It’s okay to ask for an illustration during periods of uncertainty.
The three main types of illustrations are:
- Basic illustration: The basic illustration is typically issued at the policy’s inception date or when you’re shopping and comparing different life insurance policies before buying.
- Supplemental illustration: A supplemental illustration is an addendum to the basic illustration that expands on the information contained in the original. You’ll typically need the basic illustration to refer to when reading a supplemental illustration to compare the two.
- In-force illustration: An in-force illustration is usually issued one year into the life insurance policy to show policyholders their performance and what to expect for cash value as the policy continues. It can be requested from the agent or the life insurance company.
The bottom line
The life insurance illustration is a written, visual component of a policy that clearly outlines all the information relevant to the policyholder. It explains the expenses and fees, states the death benefit, projects dividend and interest returns, and calculates estimated cash value. Be sure to speak with a trusted financial advisor who can help explain all these features in detail and ensure that your choices are best for you and your family.
Sources:
https://content.naic.org/cipr-topics/life-insurance-illustrations
https://ilife.tech/resources/articles/life-insurance-illustrations/