Policy or Sales Illustration

A policy illustration, also called a sales illustration, is a document prepared by a life insurance company that projects the future values of a life insurance or annuity policy under a specific set of assumptions. It shows premiums, death benefits, cash values, and dividends at various future ages, using both a guaranteed column based on the contract's minimum guaranteed rates and a non-guaranteed column based on current credited rates or dividend assumptions. You receive a policy illustration before you purchase a policy, and in many states, you sign it to confirm you received and reviewed it.

Think of a policy illustration like a mortgage amortization schedule: it shows how your account could grow over time, but it uses assumptions that may not hold in the real world.

Why the Two Columns Matter

Every policy illustration contains at least two columns of projected values: guaranteed and non-guaranteed. The guaranteed column shows what the policy will definitely provide if you pay every premium and the insurer never performs better than its contractual minimum. The non-guaranteed column shows projections based on assumptions that are not contractually promised, typically the insurer's current dividend interest rate or current credited rate on indexed or universal life policies.

The non-guaranteed column is where most agents and prospects focus their attention, and it is also where misleading illustrations cause the most damage. If an insurer illustrates a universal life policy at a current credited rate of 6% and rates later drop to 3%, the policy may require significantly higher premiums to maintain the same death benefit or cash value trajectory.

NAIC Model Illustration Regulation

The National Association of Insurance Commissioners adopted a Life Insurance Illustrations Model Regulation in 1995 that most states have since adopted. The model regulation requires that illustrations include a Buyer's Guide, comply with specific format requirements, and present both guaranteed and non-guaranteed values for every policy that uses current scale assumptions.

Insurers must certify annually that their illustrated non-guaranteed elements are supported by actual experience and are achievable under expected conditions. Illustrations that project values based on assumptions the insurer cannot reasonably support violate the model regulation and may constitute unfair trade practices under applicable state insurance laws.

What to Review in an Illustration

When you receive a policy illustration, focus on these specific elements.

• Guaranteed column values: If the policy performs only at its minimum guaranteed rate, does the policy stay in force until your desired age? Does the cash value grow meaningfully? If the guaranteed column shows the policy lapsing at age 75 and you need coverage until 90, the policy is not suitable at the illustrated premium level
• Premium flexibility or rigidity: For whole life, is the illustrated premium the required premium or a discretionary premium that may need to increase later?
• Internal rate of return on the death benefit: Compare the accumulated total premiums to the death benefit at various ages to understand the implicit return the policy delivers if you die at different points
• Policy loans and their effect: Illustrations that include policy loans often show the policy self-funding through loan proceeds. Understand whether those loans reduce the death benefit and how they interact with the policy's credited rate

Indexed and Variable Policy Illustrations

Indexed universal life illustrations use a hypothetical index crediting rate that reflects historical average performance. The SEC requires variable life and variable annuity illustrations to use standardized hypothetical rates of return, typically 0%, 6%, and 12%, so you can see performance across different market scenarios.

Never evaluate an indexed or variable policy illustration only on the most optimistic scenario. A variable life policy illustration showing a 10% annual return says nothing useful about how the policy performs in a decade with 2% average returns.

Sources

• https://www.naic.org/documents/model-laws-regulations-guidelines-models-582.htm
• https://www.sec.gov/investor/pubs/varannty.htm