If you have ever bought a life insurance policy or are looking to buy one, it can be overwhelming for the average person to understand it, especially when looking ahead and anticipating how these policies may perform over time. This is where life insurance illustrations become helpful. They provide a visual representation and detailed breakdown of a policy's evolution, considering several factors and scenarios.
Life Insurance illustrations clearly illustrate a policy's performance, helping you make informed decisions about your financial future.
There are three types of life insurance illustrations: Basic, Supplemental, and In-Force. Each serves a specific purpose.
It’s a good idea to request in-force illustrations often to review the policy’s performance over time.
The essence of life insurance illustrations
A life insurance illustration is a detailed performance forecast showing how the policy's cash value, death benefits, and premiums might change under different circumstances. In permanent life insurance, which includes options like whole and universal life insurance, a life insurance illustration will show you how your policy’s cash value and death benefits are anticipated to grow.
These projections are based on guaranteed and non-guaranteed elements such as interest rates, market performance, dividends, and the costs associated with insuring an individual.
On the other hand, term life insurance policy illustrations are usually straightforward. Term life insurance, by design, does not build cash value and usually has fixed death benefits and premiums, so there isn’t much to illustrate or forecast.
In essence, illustration in insurance for permanent policies gives you a glimpse into the future of these financial instruments. It helps policyholders, current or future, understand how their policies might perform under different conditions, helping them make more informed decisions about what they are investing in.
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What is in a life insurance illustration
A life insurance illustration will have several key elements, each playing a role in painting a picture of a policy's future. So whether you are looking into buying a policy or already own one, these illustrations help you analyze the value and growth potential of the life insurance policy.
Guaranteed policy benefits
These are the most common types of life insurance illustrations. Guaranteed benefits are those aspects of the policy that the insurer promises to deliver regardless of external conditions. This typically involves the guaranteed cash value – the minimum amount the policy will accrue over time – and the guaranteed death benefit, which is the amount payable to beneficiaries upon the policyholder's death.
Non-guaranteed policy values
These are projections based on current assumptions and past performance about how your policy may perform. The projections will include potential cash value and death benefits that could accrue with favorable conditions. Market performance, interest rates, and dividends might influence these projections. It is helpful to understand the potential upside of your policy, even if not guaranteed.
Illustrations usually include the premiums you will pay – the payments made to keep the policy active. Illustrations will show the initial premiums and how they might change over time. For policies where premiums can vary, such as universal life insurance policies, understanding these details helps policyholders plan their finances and determine the long-term affordability of the policy.
Policy fees and expenses
All life insurance illustrations will also include a breakdown of all fees and expenses associated with the policy. These could range from administrative charges to mortality and expense risk charges. Knowing what these costs mean and their allocation helps policyholders measure the true cost of their insurance over time.
The types of life insurance illustrations
Life insurance illustrations come in different forms, each serving a specific purpose and offering unique insights into a policy's potential performance. There are three main types of life insurance illustrations: Basic, Supplemental, and in-force illustrations. Let’s review what each one of these illustrations means to you.
The basic illustration is usually the first detailed look a potential policyholder will have at a policy's performance. It is mainly used for marketing and initial evaluation purposes; it will typically show you both the guaranteed and non-guaranteed elements of the policy. This illustration gives a snapshot of the policy's performance under assumed conditions. It will show the potential growth of cash value, death benefits, and the impact of premiums over time. Basic illustrations are helpful when comparing different policies or deciding if a particular policy aligns with your financial goals.
A supplemental illustration builds upon the basic illustration by giving more detailed scenarios. They might show you how the policy could perform under different economic conditions, such as fluctuating interest rates or market changes. This type of illustration is valuable if you want a deeper understanding of the potential variability in policy performance. It helps gauge the policy's resilience or sensitivity to external economic factors, providing a more comprehensive risk assessment.
Once a policy has been in place, policyholders can request an in-force illustration. This illustration is an updated version of the basic illustration you may have received upfront, reflecting the current status of your policy. It starts with the policy's current values at the time of the request and projects future values. In-force illustrations are beneficial if you take an active role in managing your policy. They give policyholders a chance to determine whether their policy is performing as expected or if they need to make any adjustments.
How to get a life insurance illustration
Getting a life insurance illustration is usually a very simple process in today’s day and age. Here is how you can request a life insurance illustration:
- First, decide whether you need a basic, supplemental, or in-force illustration. An in-force illustration is probably the best choice for existing policyholders looking to review their policy's performance. A basic or supplemental illustration is the way to go if you want to buy a new policy.
- Contact your life insurance company or the agent who sold you the policy. You can do this by phone, email, or the insurer’s website. Some companies might also have online portals where policyholders can request illustrations directly.
- Be prepared to provide your policy number and other relevant personal information. This helps the insurer locate your policy and prepare the correct type of illustration.
- Clearly state the type of life insurance illustration you are requesting. If you have specific scenarios in mind (like changes in interest rates or market conditions), mention these as well, especially if you’re seeking a supplemental illustration.
- Once your request is made, request confirmation and an estimated delivery time. Follow up with the insurer if the illustration is not received within the expected timeframe.
- After receiving the illustrations, review them closely. If anything is unclear, get a hold of your insurance agent for clarification.
The role of illustrations in decision-making
Life insurance illustrations help you understand how your policy is doing and if it aligns with your financial goals. Reviewing these illustrations often can help you decide whether to adjust premiums, change policy terms, or even consider a different policy altogether.
Actively getting and frequently looking over a life insurance illustration is a part of managing your insurance policy to get the best results. Getting into this practice will give you the information you need to make informed choices and help ensure that your life insurance policy stays in line with your financial goals.
We can see that life insurance illustrations give you a unique opportunity to visualize the future of a policy under different scenarios. If you have ever asked yourself, "What is an illustration?" in insurance, you can see now that it is a gateway to making better, more informed decisions about a policy, whether one you are looking to buy or one you currently own. Reviewing these illustrations will help you manage your policy better and give you a visual indication of how the policy’s performance aligns with what you set out to accomplish.
Is a life insurance illustration legally binding?
A life insurance illustration is not a legally binding document. It's a projection tool that shows potential outcomes based on current assumptions. The only legally binding elements are the guaranteed aspects outlined in the policy contract. Policyholders should use the illustration as a guide, not a guarantee of future performance.
What should I do if my life insurance illustration shows lower-than-expected values?
If your life insurance illustration shows lower-than-expected values, discussing your options with your insurance agent or a financial advisor is a good idea. You might need to adjust your premiums, consider different investment options within the policy, or reassess your policy's suitability for your financial goals.
Can I get a life insurance illustration for term life insurance?
Typically, term life insurance policies do not come with an illustration because they don’t build cash value, and their premiums and death benefits are fixed. However, exceptions like annual renewable term life insurance might illustrate potential changes after the initial premium period.
How often should I request an in-force life Insurance illustration?
It's recommended to request an in-force life insurance illustration at least every two to three years. However, if there are significant changes in your financial situation or the economic environment, it might be a good idea to request it annually.
- NAIC - Center for Insurance Policy and Research. Life Insurance Illustrations.
- Journal of Accountancy. Understanding Life Insurance Illustrations.
- Harbor Life Settlements. What Is An Inforce Illustration and Why You Should Request One?