A life insurance illustration is a document provided by an insurance company that outlines the details of a life insurance policy to potential policyholders to help them understand how the policy works, its benefits, and how premiums are structured. Life insurance illustrations provide a clear and comprehensive overview of the policy's key features and financial projections.

It's important to note that a life insurance illustration is a helpful tool for understanding the policy, but it's not a guarantee of future performance. The non-guaranteed values in the illustration are based on assumptions that may not hold true, so actual policy results can vary.

Key elements of life insurance illustrations

The information displayed in a life insurance illustration can vary based on the type of policy, but in general, here are the key elements of an illustration: 

1. Policy information: This includes the type of life insurance (e.g., term, whole life, universal life) and the policyholder's age and health-related information.
2. Premiums: The illustration will show the amount and frequency of premium payments required to keep the policy in force.
3. Death benefit: Outlines the amount that will be paid to the beneficiary upon the policyholder's death. 
4. Cash value: If the policy has a cash value component, the illustration will project how the cash value can grow over time.
5. Guaranteed and non-guaranteed values: Some insurance products have guaranteed minimum values, while others have non-guaranteed elements like dividends or interest rates. The illustration should differentiate between these and provide projections for both.
6. Policy loans and withdrawals: If the policy allows for loans or withdrawals against the cash value, the illustration may show how these transactions would affect the policy's performance.
7. Policy riders: Any additional features or riders attached to the policy, such as a disability rider or a long-term care rider, will be described in the illustration.
8. Policy exclusions and limitations: The illustration will typically mention any conditions or exclusions that apply to the policy, such as contestability periods.
9. Inflation and interest rate assumptions: The illustration may make assumptions about future inflation rates and interest rates to create projections that can impact the policy's performance.

How are life insurance illustrations created?

Life insurance illustrations use specialized software provided by insurance companies. The process begins with an insurance advisor or agent gathering information from the client, including their age, gender, health status, desired coverage amount (or, in some cases, a premium amount that the client is willing to provide), premium payment frequency, and any additional riders they want to include in the policy.

Based on the client's preferences and needs, the advisor selects an appropriate life insurance policy type from the insurance company's product offerings, such as term, whole life, or universal life.

The illustration software uses a set of assumptions to project future policy values. These assumptions may include - but are not limited to -  interest rates, dividend rates, mortality rates, expense charges, and administrative fees. The insurance company provides these assumptions, typically based on historical data and market conditions.

How to read an insurance illustration

There’s no right or wrong way to read a policy illustration; the information may be presented differently depending on the policy type and carrier. Federal and state regulations state that policy illustrations must be submitted in their entirety to a client. Advisors cannot leave out any information, even if it presents the policy unfavorably. With that in mind, here is a breakdown of some important pages that might be included in various life insurance illustrations. 

Allocation summary

Indexed and variable universal life insurance allows policyholders to invest a portion of their premiums in sub-accounts pegged to various investment options, such as stock market indexes or mutual funds. This page provides a breakdown of:

• Available index or fund choices
• Initial premium allocations
• Projections of cash value based on assumed investment performance
• Risk disclosures
• Guarantees
• Policy fees 
• Participation rates and caps in the case of indexed universal life

Ledger

The ledger details the policy's financial transactions in a life insurance illustration. It records information such as:

• Premium payments
• Deductions such as policy fees and rider charges
• Interest credits
• Loans and withdrawals from the cash value 
• And, snapshots of cash value, death benefit, and surrender value at various points in time

Riders and benefits

This section outlines the various benefits and any potential riders that may be added to the policy.  This includes:

• Disability and long-term care
• Accelerated death benefit rider
• Loan protection
• Waiver of premium

The ledger's chronological breakdown offers transparency on how these elements evolve, helping policyholders understand how their premiums are allocated and how financial transactions impact their policy's values and performance.

Life insurance illustration regulations

Life insurance illustrations are subject to regulations to ensure that they provide consumers with accurate and transparent information about the features and benefits of life insurance policies, including:

• AG 49B: AG 49B is a regulatory guideline issued by the National Association of Insurance Commissioners (NAIC) to regulate the illustrations of indexed universal life insurance (IUL) policies. It aims to address concerns about potentially misleading IUL policy illustrations by establishing uniform standards, ensuring greater consistency, and preventing insurers from projecting unrealistically high policy performance through specific bonuses or multipliers. 
• State insurance departments: While the NAIC provides model regulations, individual state insurance departments can regulate insurance practices within their respective states. They often adopt NAIC models with some modifications and enforce compliance with these regulations.
• Regulation Best Interest (Reg BI): The U.S. Securities and Exchange Commission (SEC) implemented Reg BI to require that recommendations be in the client's best interest and that conflicts of interest are disclosed.

Next steps

A Brokerage General Agency (BGA), like Modern Life, can play a valuable role in assisting financial advisors and their clients with life insurance illustrations in several ways:

1. Access to multiple carriers: BGAs work with a wide range of life insurance carriers, allowing advisors to access various insurance products and choose the one that best suits their clients' needs. Through illustrations, BGAs can help advisors compare and contrast different policies' features, benefits, and costs, allowing them to make informed recommendations.
2. Expertise: BGAs have experts who understand the intricacies of life insurance illustrations. They can assist advisors in creating accurate and compliant illustrations to ensure that the illustrations presented to clients are realistic and transparent.
3. Product knowledge: BGAs can help advisors identify policies matching their client's financial goals and risk tolerance. This includes understanding how different policy features and riders may impact the illustrated values over time.
4. Underwriting support: BGAs can assist advisors in navigating the underwriting process. They can help gather and organize the necessary documentation, streamline the application process, and provide insights into how different underwriting decisions may affect the policy's performance and cost.
5. Case design assistance: BGAs can assist advisors in designing insurance solutions tailored to their client's unique needs and financial situations. They can help advisors consider different funding strategies, policy types, and riders that can enhance the overall benefit of the policy.
6. Post-issue support: After a policy is issued, BGAs can continue to provide support by assisting with policy servicing, such as beneficiary changes, premium payments, and policy updates. 

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