What is a Life Insurance Illustration?
A life insurance illustration is a tool applicants can use to understand how a potential policy is expected to perform over time. It breaks down the guaranteed elements of the policy’s performance alongside the non-guaranteed elements.
Using life insurance illustrations to understand coverage
Not all life insurance companies issue illustrations, and those that do may not issue them for all of their policies. You might not need a policy illustration to understand term life insurance, for example, because it’s a relatively simple type of coverage.
But for permanent life insurance that includes a cash value component and/or the payment of dividends, the life insurance illustration can help to outline what the policy owner can expect based on the insurance company’s current projections.
Types of life insurance illustrations
The National Association of Insurance Commissioners (NAIC) uses Model #582 to regulate life insurance illustrations.
Per this model, insurers can issue three types of illustrations:
Basic illustrations. These are the primary illustrations and the most heavily regulated. The NAIC says they have to break non-guaranteed elements (like variable cash value growth rates) out from guaranteed elements. This allows the prospective policy owner to see how the policy would perform under worst-case conditions, as well as the conditions the insurer expects.
Supplemental illustrations. Some insurers also issue supplemental illustrations, which allow them to show prospective life insurance purchasers how specific policy elements would perform, usually under preferred conditions.
In-force illustrations. While life insurance illustrations are often primarily a sales and educational tool deployed for people currently shopping for coverage, you can request periodic illustrations once your policy is active (usually after you’ve had the policy for at least a year). These in-force illustrations provide the same data as a basic illustration, but they’re updated using the insurer’s most current data and projections.
While policy illustrations can be a helpful projection tool, policy owners should know that only the elements specifically labeled as “guaranteed” are just that: guaranteed by the insurer. Everything else is simply a highly educated guess.
Requirements for life insurance illustrations
Life insurance illustrations are regulated by NAIC’s Life Insurance Illustration Model Regulation (Model #582). This means there are some required components that need to be present in every illustration, such as:
Cash value
Inflow from the premiums