Understanding Life Insurance Illustrations
Life Insurance Illustrations are projections that are prepared by life insurance companies for potential customers to see how a policy would perform over their lifetime. Term Life illustrations project the lifetime of the policy and Permanent Life illustrations project as long as you might live – usually to over 100 years of age.
Term Life illustrations will normally include:
1. Current Premiums and Maximum Premiums for each year
2. The total amount you have paid into your policy up to that year
3. Each year’s death benefits
Term Life illustrations are relatively easy to read. Permanent Life illustrations are more complicated and potentially deceitful. Whereas Term illustrations will normally be about 3 pages, Permanent illustrations will be about 10 pages.
First Thing’s First
The first thing to remember when looking at a Permanent Life illustration is that nothing is guaranteed but the numbers labeled “guaranteed”. A good, trustworthy insurance agent will tell you this and encourage you to view projections beyond “guaranteed” numbers as a potential increase in benefit. These numbers are a long-term estimate of investment success and cannot be promised. however many insurance agents will use them to sell you on their policy.
Interest Rates (Universal Life Illustrations)
The insurance agent you deal with has the ability to enter any interest rate he/she chooses into the formula for your illustration. If the interest rate is higher, your return will look better. Insurance companies can only guess how well investments will appreciate, how much mortality costs will be in X number of years, and their own expenses. Again, these are not guaranteed numbers and can be greatly inflated in your illustration. Be sure to ask the companies you are comparing to set their interest rates at the same level for illustration purposes and make sure it is a conservative rate – not necessarily the current rate!
Finally, ask for an illustration with current interest rates continuing into the future AND an illustration with a 2-point drop in interest rates. If you are comparing different companies, this can be very helpful. The numbers can change dramatically, even with a small percentage change. Generally, the policy that looks better at the lower rate will be with the more conservative company and have a better chance of paying out what was projected.
The most important thing to remember is that illustrations are only projections, estimates, best guesses, etc. Nothing is etched in stone and you should be very careful and conservative when comparing insurance policies.