How Reliable are Life Insurance Policy Illustrations?

How Reliable are Life Insurance Policy Illustrations?

by Byron Udell, March 2012

Life insurance policy illustrations are projections for how a policy will perform in the years to come. If you're shopping for life insurance, chances are, each company and agent you contact will offer you one or more of these “illustrations” that purportedly demonstrate the true cost of the insurance and the policy's future cash value, if any. For customers, these illustrations provide information that can be useful—that is, if you know exactly what you're looking for.

Ever since such illustrations came into use (about the time insurance agents began using automated software), generally they've been viewed with skepticism. At best, many have been misunderstood; and, at worst, used—either negligently or intentionally—to create unrealistic expectations. In recent years, as some policies have failed to meet their illustrated performance goals, consumers claiming to have been misled have filed numerous lawsuits.

Who's at fault here? Some would say:

  • The insurance companies that distributed the software and encouraged—or at least made it possible—for agents to produce illustrations that could be misunderstood or erroneous
  • Their agents, who may have used the software but could or should have done a better job explaining to buyers how the policies they sell really work and which portions of the illustrations were guaranteed and which were not
  • The buyer, who perhaps should have (a) read the fine print and (b) known that an illustrated favorable interest rate probably wouldn't reach or stay at the projected level

All three could share in the blame, but instead of focusing on that, let's look at what we know for certain:

The only promises a life insurance company makes when it sells a product are its contractual guarantees. Illustrations are not promises—they are merely hypothetical scenarios of what might occur if certain (disclosed and undisclosed) assumptions come true.

Don't Take Premiums at Face Value

The fact is, life insurance companies can illustrate any non-guaranteed numbers they want, including non-guaranteed premiums, “vanishing premiums,” cash values and death benefits. There is no accountability for the reasonableness of the assumptions in these illustrations. As a result, comparing policies based on non-guaranteed assumptions has been—and will continue to be—a notoriously unreliable method of determining which policy actually offers the best value for the money.

Of what value, then, are illustrations in helping you examine the relative merits of various policies? They can be useful in comparing what each company is willing to guarantee contractually. Beyond that, consider who's making the guarantee. Is the company highly rated and financially stable? That's important, but even then you must exercise caution.

Many top-rated organizations offer good combinations of low prices and strong guarantees, but others may charge more and guarantee less, relying on their financial ranking and reputation to get buyers to simply “trust” them to deliver long-term values.

Two Key Questions to Ask

To avoid misunderstanding what life insurance policy illustrations mean, you can ask these two simple questions:

  1. When comparing level-term life policy illustrations (a few of which now offer guaranteed level premiums as long as 30 years), the key question to ask is: For how long is the illustrated premium absolutely guaranteed? This is important because there may be conditions that increase or cause fluctuations in premiums.
  2. When comparing permanent (cash value) life insurance policies, the key question to ask is: What is the minimum annual premium necessary to absolutely guarantee the full death benefit all the way to age 100? Be sure to get all of this in writing and read the fine print on what the company actually promises.

Insurance illustrations by nature are complex—and you shouldn't expect to be able to effortlessly decode them without the help of an insurance specialist. However, if you know to ask the right questions, you may be able to get the answers you need to decide if a particular policy is right for you. After all, shopping for insurance is one thing you shouldn't take with a grain of salt.

AccuQuote has been a leading life insurance company for over 25 years. AccuQuote works with many top-rated life insurance carriers to help customers find the best and most affordable coverage. Learn more or get a quick and free quote by clicking here or calling 1-800-913-2138.