Life Insurance Illustration

A life insurance illustration is a document showing how a life insurance policy's premiums, cash values and death benefits are projected to change over time. The National Association of Insurance Commissioners' Life Insurance Illustrations Model Regulation defines an illustration as "a presentation or depiction that includes non-guaranteed elements of a policy of life insurance over a period of years," and requires one used in a sale to be "clearly labeled 'life insurance illustration.'" In states that have adopted the model, the regulation governs what an illustration must show and what it may not claim.

Illustrations matter most for policies whose results depend on the insurer's future decisions: the yearly amounts a participating whole life policy pays its owner, and the credited interest and charges on universal life. Level term insurance, whose premium and death benefit are fixed, has little to illustrate.

Three kinds. The model names a basic illustration, "a ledger or proposal used in the sale of a life insurance policy that shows both guaranteed and non-guaranteed elements"; a supplemental illustration, which may use a different format but no more favorable assumptions; and an in-force illustration, furnished after the policy "has been in force for one year or more."

Guaranteed against non-guaranteed. The model's definitions make the split the center of the document. Guaranteed elements are premiums, benefits, values, credits or charges "that are guaranteed and determined at issue," and non-guaranteed elements are those "that are not guaranteed or not determined at issue." The guaranteed values must appear first, and every page showing only non-guaranteed values must point back to them. The narrative summary must include a statement to the effect that the illustration "assumes that the currently illustrated nonguaranteed elements will continue unchanged for all years shown. This is not likely to occur, and actual results may be more or less favorable than those shown."

The ceiling on optimism. The non-guaranteed columns may not be more favorable than the insurer's "illustrated scale," which in turn is capped by a "disciplined current scale" reasonably based on the insurer's actual recent experience and certified each year by an illustration actuary. Among the practices the model forbids are stating or implying that non-guaranteed elements are guaranteed, depicting performance more favorable than the illustrated scale, and using terms such as "vanishing premium" for a plan that relies on non-guaranteed elements to pay part of future premiums.

The midpoint column. The numeric summary of a basic illustration shows values at years 5, 10 and 20 and at age 70 on three bases: the guarantees, the illustrated scale, and a midpoint that cuts a participating policy's illustrated payments to the owner in half and sets credited interest and charges at the average of the guaranteed and illustrated rates. If the policy would lapse on any basis, the year it would do so has to be shown. The buyer signs a statement acknowledging that the non-guaranteed elements "are subject to change and could be either higher or lower."

What it does not cover. The model applies to "all group and individual life insurance policies and certificates except" variable life, annuities, credit life, and policies with no illustrated death benefit over $10,000. Variable universal life is sold with a securities prospectus, and the illustration rules for indexed universal life add an actuarial guideline of their own.

1. The agent or insurer prepares a basic illustration for the proposed insured's age, rating class, premium and death benefit.
2. The illustration shows three bases: guaranteed, illustrated (today's scale held constant) and midpoint, with the year coverage would end on any basis where it would.
3. The applicant and the agent sign it, and a copy goes to the insurer with the application. If the policy is issued differently, a revised illustration comes with it.
4. After issue, the policy owner receives an annual report and can request an in-force illustration based on the insurer's current scale.

Take an example: a universal life illustration credits 6.0% interest on the illustrated scale, against a guaranteed minimum of 3.0%. The midpoint column must use (6.0% + 3.0%) / 2 = 4.5%. On a participating whole life policy that illustrates a $1,200 payment to the owner in year ten, the midpoint basis shows 50% of it, $600. If the policy lapses on the midpoint basis at age 88, the illustration has to say so.

Pros

• The required layout separates what is guaranteed from what is not, so a reader who knows where to look can see the contract's floor.
• The midpoint basis shows how the policy behaves if results fall partway between the illustrated scale and the guarantees.
• In-force illustrations let an owner check an older policy against the insurer's current scale, which matters before any replacement.

Cons

• The illustrated columns assume nothing changes for decades, and the document itself says that is not likely.
• The non-guaranteed figures depend on future decisions the insurer controls, such as its crediting rates and charges.
• The model regulation binds only in states that have adopted it, and it does not cover variable life or annuities.