Because of the cash-value elements and its complexities, it is much more difficult to analyze a permanent life insurance policy in a potential replacement situation. Also, there are many different types of permanent policies.
However, for the purpose of the worksheet provided here, we will use the generic term “permanent life insurance” to refer to any policy that builds a cash value, including whole life, universal life, variable life, variable universal life, and other variations.
Please note that the use of the word “illustrated” in this worksheet means that results are not guaranteed.
An illustration is nothing more than a projection, which is based on a bundle of assumptions that may or may not occur in real life. That does not mean that life insurance companies are guilty of misrepresenting information to customers.
Quite the contrary, the truth is that neither the insurance company nor any person knows the future, so we have to make intelligent guesses. The result is a so-called linear or deterministic projection.
An illustration may assume an interest-credited rate of 6 percent. However, in the real world, interest rates fluctuate, so that 6 percent illustrated rate is not realistic, even if it is a perfectly reasonable assumption.
A truly realistic illustration would have to assume a constantly variable interest rate, which is virtually impossible.
Keep in mind that different companies use different assumptions in preparing illustrations, which should never be solely used to compare policies.
State insurance regulation require – for you protection – that both the proposed replacing company and your existing company prepare current illustrations for your consideration in making an intelligent replacement decision.
These illustrations will show the effects of the surrender charge on the existing and proposed policies.
In situations where the current policy will be modified, but not terminated, comparisons should include in-force ledgers (illustrations) of the policy before and after the change, if available.
Reduced-scale illustrations – illustrations showing lower interest rate crediting assumptions – should be provided on both existing and proposed policies to demonstrate the effects of volatility on the performance of non-guaranteed policy element under certain circumstances. These illustrations should also be consistent with those required by the NAIC illustration regulations, when applicable in your state.
This worksheet is intended for evaluation purpose only and is not a substitute for state replacement requirements.
Illustrations should never be the sole criteria for evaluating a replacement. This is because illustrated cash values and death benefits are never reliable predictions of future results. More information is needed.
It is recommended to find out the underlying assumptions for the current in-force illustration as well as for the proposed policy.
You should be aware that there might be differences in the assumption used by each company, which may render a comparison based upon some illustration invalid.
Also, keep in mind that replacement of an existing policy generally results in the reduction of cash-surrender value as a result of new acquisition cost.
By Tony Steuer, CLU, LA, CPFFE
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.