Life Insurance Illustration: What It Is and How to Get One

When you buy cash value life insurance, it can be hard to understand how the policy’s value will grow. That’s why a life insurance policy illustration is helpful.

A life insurance policy illustration is a document that depicts how a life insurance policy is expected to perform based on different scenarios. A typical policy illustration will show you how a policy’s cash value, death benefit and premiums could change over time.

Permanent life insurance policies offer a death benefit and a savings component called cash value. Depending on the type of permanent life insurance you buy, the policy’s cash value and death benefit may fluctuate based on factors the insurer doesn’t guarantee, like interest rates, market performance, dividends, administrative expenses and the cost of insuring you.

Term life insurance typically doesn’t come with a policy illustration. That’s because a term life policy doesn’t build cash value, and the death benefit and premiums usually stay the same, so there’s no need to illustrate various scenarios. An exception is annual renewable term life insurance. These policies usually guarantee the premiums only for the first few years, so they will often have an illustration to show what happens after the initial level premium period.

As an example of how a life insurance illustration works, let’s assume you buy a whole life policy. Whole life insurance provides a guaranteed death benefit, and it also guarantees your cash value will grow at a minimum rate. Many policies also pay dividends, though they’re never guaranteed. When the company does pay dividends, the policyholder has the option of using them to increase the policy’s death benefit or cash value.

Your policy illustration would show you the guaranteed minimum value of the death benefit and cash value after certain periods of time (for example, after five years, 10 years and 20 years), assuming no dividends. The illustration would also provide projections for growth if the policy maintains its current dividend, along with a midpoint scenario where the company pays dividends at a lower rate.

There are three main types of life insurance illustrations:

• Basic illustration. A basic illustration is used for marketing purposes and shows both the guaranteed and nonguaranteed elements of the policy. 

• Supplemental illustration. This is essentially an extension of the basic illustration and shows how the policy may perform under additional scenarios.

• In-force illustration. This is an updated version of the basic illustration that a policyholder may request once the policy has been in force for at least a year. Some insurers may provide this on their own. The in-force illustration starts with the current values at the time it is generated and projects those values into the future.

The specific details included in a life insurance illustration will vary somewhat by policy, but you’ll usually find these elements:^[0]

• Guaranteed policy benefits. You’ll see the guaranteed cash value and death benefits. Guaranteed values present the policy’s worst-case scenario for growth.

• Nonguaranteed policy values. These projections for the policy’s growth are based on factors that are not guaranteed, like interest rates and whether the company pays a dividend. Midpoint estimates that fall somewhere between these two scenarios are also frequently provided.

• Premiums. The illustration shows the minimum premiums needed to keep the policy in force. It also typically accounts for the costs of additional life insurance riders.

• An explanation of policy fees and expenses.

A life insurance illustration will usually contain a summary, followed by a detailed tabular estimate of various scenarios, often broken down to show projected policy values on a year-by- year basis.

For example, a sample illustration from MassMutual of a $100,000 whole life policy prepared for a 21-year-old woman shows a guaranteed cash value of $6,768 and a guaranteed death benefit of $100,000 by the end of year 10. However, based on the nonguaranteed assumptions provided by the insurer, the policy has a projected cash value of $8,787 and a projected death benefit of $108,816.^[0]

Insurers calculate a policy’s performance by making projections about several factors. They estimate the company’s expenses, mortality charges (the cost of providing insurance on your life), and earnings such as interest or dividends. Those projections are used to determine the premiums the insurer must charge to pay those benefits, as well as how much money it must keep in reserves.

The guaranteed values presented in the illustration represent the worst-case scenario for the policy’s growth. However, the illustration will also contain projections based on nonguaranteed elements, such as recent interest rates, expenses and policy dividends.

A life insurance illustration can be an important tool in financial planning. You can use it to estimate the size of the death benefit that will be available to your life insurance beneficiaries, as well as the amount of cash value you’ll have to withdraw or borrow against. You can also request multiple scenarios, such as illustrations that show the effect of specific interest rates. However, because of the complexities involved with deciphering an illustration, consider reviewing it with a qualified life insurance advisor or agent.

An in-force policy illustration can help you gauge your policy’s performance. You can use the projections provided in the document to determine whether the projected death benefit and cash value will be enough to meet your needs. For example, if you find that the cash value isn’t growing as quickly as past illustrations suggested, you may need to find other ways to build your savings, particularly if you plan to use the cash value to supplement your retirement income. You can also use an illustration to compare policies, whether you’re shopping for a policy or you want to switch policies.

For policies that allow you to adjust your premiums, such as universal life insurance, an in-force illustration will also let you know if you will need to pay a higher premium or pay for a longer period than expected. This may be necessary if the policy is underfunded, meaning it doesn’t have as much cash value as expected. Getting an in-force illustration enables you to monitor for a potential policy lapse.

You’re generally entitled to a free in-force policy illustration every year. A good guideline is to request one at least every two or three years to review the policy’s performance. If it looks like your policy is having issues like a declining cash value, ask for an in-force illustration every year.

You can do so by contacting either your life insurance agent or your insurer by phone or in writing. Many insurance companies allow you to make this request online. If you don’t receive the illustration within 30 days of your request, contact your state’s insurance department.