What it means
Insurance policies that build cash value, such as whole life or universal life, are complicated products. The illustration turns them into a table so the buyer can see what is paid in, what might build up and what is paid out.
Typically it shows both a guaranteed column and a projected column, together with the premium the buyer is expected to pay each year and any charges taken out of the policy. The guaranteed column uses the minimum the insurer must honour.
The projected column uses current assumptions about investment returns, dividends or crediting rates, which are not guaranteed. The gap between the two columns is the part of the sales pitch that depends on future events.
Regulators in many places require insurers to follow rules about illustrations, including showing guaranteed figures and a clear warning that projections can change. Agents may also be required to sign a statement that they have explained the assumptions.
These safeguards exist because optimistic illustrations have misled buyers in the past. A finance-literate buyer should read the illustration critically.
Ask what return is assumed, how long premiums must be paid, what happens if premiums are missed, and how charges are taken. Also ask for a second illustration using a lower return, which shows how fragile the policy is and whether it is a firm financial commitment or a hopeful one.
An illustration is not a contract. The policy document itself sets out the legal terms, so the buyer should compare the two before signing.
Finally, remember that an illustration shows one scenario for one set of facts. Changes in health, income, tax law or the insurer's own policies can all alter the outcome later.
Asking for a fresh illustration every few years, called an in-force illustration, is a sensible way to keep track.
In practice
Real-world examples.
Example
A 40-year-old business owner is offered a universal life policy to protect a family firm's loans. The illustration shows a projected cash value after twenty years, and the owner asks for a version at a lower return to see how much it falls. The comparison helps the owner decide how much risk of a shortfall is acceptable.
Example
A financial adviser compares illustrations from two insurers for a client. The adviser focuses on the guaranteed columns, because they are the only figures both insurers must honour. A policy that looks weaker on projections may in fact be more dependable on guarantees.
Example
A couple buying a policy to fund a child's education reads the footnotes on an illustration and finds that the strong projections rely on premiums being paid for the full term. They decide to ask what happens if they miss a payment. The agent confirms that the policy could lapse, and the couple choose a smaller policy with more affordable premiums.
Case study
Seen in the real world.
Lakeshore Mutual is a fictional insurer whose agent presents an illustration to a customer, Maya. The projected column shows a large cash value in year 25, while the guaranteed column shows a much smaller figure. Maya asks which one she should expect, since the difference between them is large.
The agent explains that the projection depends on the insurer keeping its current crediting rate. This illustrative conversation leads Maya to request a second illustration at a rate two percentage points lower.
The second version shows that the policy still works but with higher premiums needed in later years, which Maya must be confident she can afford when she is older. Maya decides to buy, with a clear understanding of the range of outcomes, and keeps both illustrations in her file so she can compare them with the annual statements she will receive later.
Watch out
Common mistakes.
- Treating the projected column as a forecast. It is based on current assumptions that the insurer can change.
- Ignoring the guaranteed column. It shows the worst case the insurer must honour, and a policy that only works in the projected column is carrying real risk for the buyer.
- Assuming the illustration is the contract. Only the issued policy document is legally binding, so any promise made in a sales meeting should be checked against it.
Questions
People also ask.
Why do illustrations show two sets of numbers?
One set shows the guarantee and the other shows the current projection, so the buyer can see the range between the worst case the insurer must honour and what is hoped for.
Can an illustration be wrong?
It can be accurate to its assumptions and still turn out wrong, because future returns and charges are not known in advance, which is why the guaranteed column matters so much.
What should I ask the agent for?
Ask for illustrations at lower returns, a list of all charges, and what happens if premiums stop, and keep copies of everything you are shown before you sign.
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