Are Life Insurance Policy Illustrations Reliable?
For Immediate Release
June 29, 2012
by Byron Udell, Founder and CEO of AccuQuote
If you're shopping for life insurance, chances are you'll be offered one or more "illustrations" that purportedly demonstrate the cost of the insurance and the policy's future cash value, if any.
Illustrations are at best misunderstood. At their worst, they create (deliberately or accidentally) unrealistic expectations. In recent years, when some policies failed to perform as the illustrations suggested, consumers filed lawsuits.
Who's at fault here? Is it:
The insurance companies, which 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 really work and which portions of the illustrations were guaranteed and which were not?
The buyers, who perhaps should have (a) read the fine print and (b) known that a high interest rate that may have been illustrated was probably unlikely to be attained or sustained?
I'll let you decide who's to blame. More important, let's focus on what we know for certain. One certainty is that the only promises a life insurance company makes are found in its contractual guarantees. Illustrations are not promises. They are, after all, merely sales tools — hypothetical scenarios of what might occur if certain (disclosed and undisclosed) assumptions come true.
The fact is, life insurance companies can illustrate any non-guaranteed numbers they want, including nonguaranteed 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 whether a policy actually offers a great value.
On that basis, then, can illustrations help you examine the relative merits of various policies? Yes, in one important way: They can be useful in comparing what each company is willing to guarantee contractually. That's it.
And as you consider the guarantees, ask yourself: Who's making those guarantees? Is the company highly rated and financially stable? That's important, but even then you must exercise caution. Many top-rated firms 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.
So, to help you avoid misunderstandings about life insurance policy illustrations and what they mean, just follow these two simple guidelines:
1. When comparing level-term life policy illustrations, ask: How long is the illustrated premium absolutely guaranteed?
2. When comparing permanent (cash value) life insurance policies, ask: What is the minimum annual premium necessary to absolutely guarantee the full death benefit all the way to age 100?
These two simple questions will help you effectively compare quotes from multiple insurance companies, while avoiding the risk that you might one day find yourself surprised and disappointed in the performance of the policy you select.
Editor's note: This is a continuing series from AccuQuote, Edelman Financial's insurance partner. Contact your Edelman planner to discuss your insurance needs. Working with AccuQuote, we'll find you the best and most affordable insurance solutions consistent with your financial planning needs.