You’ve purchased a life insurance policy and paid the premiums for many years. Like most people, you’ve relied on the sales illustration and expect that your policy will remain in force to maturity and no changes will be necessary.
Life insurance policies are often bought (and sold) with the thought that they are “set it and forget it.” In other words, they will perform as planned and do not need to be monitored. If you’re not reviewing your life insurance coverage periodically, you may find yourself with a policy that’s stumbling.
Permanent life insurance policies are complex financial instruments with many variables that impact the policy “performance.” Permanent life insurance policies that offer cash value components include: whole life, universal life, variable life and indexed life insurance.
A life insurance policy’s performance is based on three basic components:
- Cost of insurance
- Overhead expenses
These components will have different names by type of policy and some policies have more components. Each of these impacts performance, specifically cash value accumulation and how long the policy stays in-force.
You might be in the dark right now about how your cash value life insurance is doing. Insurance companies and agents often do not discuss the impact of changes to these components. If things go wrong with the policy components, you may find yourself with a policy that requires substantially higher premiums than originally planned or that terminates before maturity.
What is an In-Force Illustration?
An in-force illustration is the only way to gauge the potential future performance of a policy and to see if changes are needed in order to avoid problems.
An in-force illustration uses current policy values (cash value, death benefit and loan balance) and projects future values based on:
- Current earnings (interest rate/dividend that helps grow your cash value)
- Mortality (the actual cost of the life insurance for you)
- Expense charge (the insurer’s fees)
A life insurance company can change any of these policy components at their discretion and usually are not required to disclose that they have made a change or what that change is. An in-force illustration will help you determine if any modifications will impact your life insurance policy.
Term life insurance policies do not require in-force illustrations.Term life policies have a death benefit for a specified number of years. And on most term life policies, the premium you pay is guaranteed not to change for the term period. (Some term policies do have premiums that increase over time.)
Why Should You Request an In-Force illustration?
The life insurance sales illustration you saw when you bought the policy is based on earnings, cost of insurance and expense charges all remaining constant. This is the Achilles heel of life insurance policy illustration because it’s improbable that there will be no fluctuation in interest rates, mortality costs or overhead expenses over a long period of time. Change is a certainty.
An in-force illustration helps you determine whether you need to take action to keep your policy alive. You can compare the in-force illustration to the original sales illustration to see if the policy is performing as you expected. The projected values you see now will often be quite different from the originally projected values.
Ordering an in-force illustration will help you avoid unpleasant surprises. For example, if your cash value is unexpectedly depleted by costs and charges, the policy could terminate earlier than expected. To avoid that, you may suddenly find that you need to pay premiums for a longer period—or substantially increase the premiums you’re paying—to keep the life insurance policy in-force.
A small number of life insurance companies include in-force illustrations with annual statements. Other companies’ annual statements will include projections of how many years the policy will stay in force and, if applicable, the projected year the policy will lapse. Most insurance companies don’t include even this minimal amount of information.
How To Request an In-Force Life Insurance Illustration
You can request an in-force illustration through your life insurance agent or directly from your insurance company. The request can be made over the phone or in writing. Some insurance companies will allow you to request in-force illustrations through a customer portal. The request must be made by the policy owner.
Your request for in-force illustrations should include the following scenarios based on the current earnings rate, mortality and expense charges:
- As is, based on your current premium payments staying steady.
- Calculate the premium required to endow the policy at maturity
- If you have a policy loan, request these scenarios: paying off the loan, continuing the loan while paying interest out of pocket, and borrowing future premiums and loan interest to pay the premiums.
- Other scenario(s) that you are considering, which might include changing the dividend option, taking out a loan or taking a partial cash value withdrawal.
Your insurance company may say they cannot provide an in-force illustration. But note that insurance companies are required to furnish an in force illustrationof current and future benefits and values based on the insurer’s present illustrated scale (showing your current premiums, earnings rate, cost of insurance and expense charges). This is required by The National Association of Insurance Commissioners Life Insurance Illustrations Model Regulation (model #582).
Policy owners are entitled to request an in-force illustration annually and should receive it within 30 days from the request.
How to Review an In-Force Illustration
Now that you have the illustration you requested, you might feel lost. Reading an in-force illustration can seem like a daunting task. Some insurance companies will include a header or notation at the top of an in-force illustration describing the scenario. Most insurance companies don’t provide any guidance. A qualified financial advisor who knows life insurance well can help you sort through the pages, but it can be hard to find someone with expertise in this area.
In order to be able to interpret an in-force illustration, you’ll need to take into account the following:
- Make sure that you have received all pages of the illustration (page numbers are at the bottom).
- In-force illustrations will have the following columns for cash value and death benefits will reflect projections based on current earnings rates, mortality costs and expense charges, along with guaranteed values that assume the minimum earnings rate (interest or dividends) and maximum costs (mortality costs and expense charges). There may also be columns for mid-point assumptions.
- The premium column will reflect the premium due each year. Some illustrations will include a net cash value on whole life policies where the dividend option is used to reduce premiums.
- The cash value column under current values (assumptions). If the cash value reaches a peak and then starts to decrease, that is a warning sign that the policy is in peril. The policy will lapse when the cash value reaches zero (unless it is a guaranteed policy).
- The death benefit may also start to decrease when the cash value decreases on certain policies.
The cash value will start to decrease when the policy expenses (cost of insurance and expense charges) exceed earnings. Permanent life insurance policies are typically designed so that future higher costs of insurance are offset by lower net amounts at risk to the insurance company. The net amount at risk is the death benefit minus cash value.
If your illustration shows a decrease in cash value, you’ll want to take action. While the decrease may be far in the future, the sooner that you address the issue, the better. You’ll want to increase the premium you’re paying, as shown in the in-force illustration, making sure the premiums will propel the policy to maturity. The longer that you wait to address the issue, the more you’ll have to pay in premiums later to keep the policy going.
Guaranteed universal life insurance policies are an exception. These policies will usually not accumulate any cash value. Their in-force illustrations will show the premium and death benefit continuing to maturity in the guaranteed values columns.
It’s important to request an in-force illustration every two to three years because your policy components will continue to fluctuate. You should also request an in-force illustration when you are considering making a change to the policy. For example, if you’ll miss a premium payment, take out a policy loan or take a cash withdrawal, check the in-force illustration to make sure you don’t have unpleasant consequences.
This article originally appeared on Forbes Advisor (here).