How to Understand Life Insurance Illustrations

When it comes to buying life insurance, you want to make sure that you get the best coverage for your needs. Comparison shopping can already be kind of a hassle, but things get even more complicated when life insurance illustrations come into the mix. 

Because these documents can be more than a little confusing to the uninitiated, we wanted to take this opportunity to provide some valuable insight. You don’t need to be a master of life insurance illustrations, but understanding the basics can help you out immensely when buying a policy. 

What is a Life Insurance Illustration?

If you’re expecting to see charts, graphs, and other images in a life insurance illustration, you’ll be sorely disappointed. Unfortunately, these documents are just page after page of different numbers, which can all seem to blend into each other if you’re not familiar with the layout. 

To sum it up as simply as possible, a life insurance illustration is designed to provide insight into how a policy will perform over time. Part of the reason why they can be so overwhelming is that the company will project these numbers over decades, so the pages can fill up remarkably fast. 

Also, because whole life insurance plans are flexible and have varying options, an illustration has to include all of these different variables. Once you pick a policy, though, you can get a streamlined version that just has the elements you’ve chosen. 

In most cases, an illustration is meant as a way of selling insurance prospective buyers. When comparing plans and rates, you will need to see these illustrations so that you can determine how well your insurance will perform in the long-term. 

Unfortunately, because the future isn’t set in stone, most of these numbers are estimates, and each company will use varying formulas to determine how well a policy will do. In some instances, the insurer may provide higher numbers to make a plan more enticing, even though there is no guarantee that the projection will be accurate. 

We’ll go over how to compare policies later on, but the first thing you need to remember is that the majority of the numbers you’ll see in an illustration are estimates, not cold hard data. 

Term vs. Whole Life Insurance Illustration

If you’re trying to make the life insurance buying process as simple as possible, you will likely opt for term insurance. Because these policies don’t have that many variables, illustrations for them are much easier to understand. 

For comparison, term insurance illustrations can be around two to three pages with about 100 numbers. Whole insurance, however, can run up to 10 pages or more and have over 1000 figures. 

Although those figures can be shocking at first, don’t let that turn you off of whole life insurance . Depending on your needs, permanent life insurance can be an excellent option. So you need to be able to skim through the illustration. Now let’s get into the nuts and bolts of what’s contained within these documents. 

What’s Included in a Life Insurance Illustration?

Before running through the numbers and projections, you will need to browse the data at the front of the illustration. Your insurance agent should have plugged in the different variables you may want. As well as personal details like age, medical history, and health rating. If any of this information is incorrect, be sure to notify your agent and get an updated illustration. 

Assuming that everything is right, here is a quick breakdown of what you can expect to see on an illustration. This is both for term and whole life insurance. 

Term Insurance Illustration

Typically, these pages will contain three sections. The numbers within those sections will be based on the life of the policy. So, if you have a 20-year term, they will only continue through those 20 years. While you can renew your plan when your time is up, the illustration won’t include that information. 

The three categories for this illustration are:

  • Current and Maximum Premiums Per Year
  • Total Premiums Paid Into the Policy to Date
  • Death Benefit Per Year

Some policies will require you to re-enter them at certain stages. For example, if you have a 20-year plan, you may have to take another medical exam at 10 years to show that you’re still healthy. If there are re-entry dates and qualifications, those will also be listed in the illustration. 

How to Understand Life Insurance Illustrations

Whole Life Insurance Illustration

Because these policies can accrue cash value, there are many more numbers to pay attention to in the illustration. Although each company is different, here is what should be contained within the document

  • Premium Payments – these can adjust over time, particularly depending on your health status. Some insurance companies will lock in rates for a specific period. But you’ll likely have to pay more as you get older. 
  • Guaranteed Minimum Cash Value (GMCV) – these numbers are set in stone, so you want to pay attention to these the most. Once you sign up for your insurance, the company will have to honor these figures. 
  • Projected Dividends – the insurance company will invest the cash you earn in your policy. These projections are based on investment history, as well as the level of risk you’re taking.
  • Projected Cash Value – unlike the GMCV, the insurer will estimate how much money you’ll make in dividends. Ass well as how much you’ll pay in premiums. In some cases, companies will inflate these numbers to make them more appealing. So be careful when looking at long-term projections. 
  • Guaranteed Death Benefit – depending on when you die, your policy will pay out a minimum death benefit. These numbers are also set in stone, so you can pay closer attention to them. 
  • Non-Guaranteed Death Benefit – as your cash value grows, that money can be rolled into your death benefit. Again, these numbers can be based on optimistic figures, so keep that in mind. 

What makes this life insurance illustration so overwhelming is that each of these numbers is listed for the life of the policy. Since you’ll presumably keep paying premiums for decades, the projections can be for 40 or 50-plus years. 

How to Compare Life Insurance Illustrations and Policies

If you’re not looking forward to buying life insurance, you may want to pick the policy that has the highest payouts and cash value projections. However, you want to be better prepared, especially since most of the figures are not guaranteed. Here are some factors that you should keep in mind when comparing illustrations and plans. 

Determine Your Goal for Life Insurance

First and foremost, why do you want whole life insurance? Since the primary selling point of this kind of policy is the cash value, you will need to figure out how you want to use it. Here are a few examples of options you can consider. 

  • Increased Death Benefit – typically, any cash value left over when you die will return to the insurance company. However, you can purchase a rider that includes the money in your death benefit. Be sure to talk to your agent, as not all policies allow this rider. 
  • Retirement Planning – depending on the insurance you get, you can anticipate a substantial cash value when you retire. Annuities are an easy way to get that money as regular income, while the remaining balance still earns dividends. 
  • Insurance Loans – you can borrow against your cash value while you’re still alive. Each insurer has different qualifications to meet, but it’s a viable option for significant life purchases (i.e., a home). 
  • Lower Premiums – some people want to avoid paying for life insurance later on, particularly during retirement. You can use your cash value and dividends to pay your premiums. Once it reaches a certain point, you can avoid paying altogether without losing your coverage. 
  • Increased Insurance – as dividends get paid out, you can either accept them as cash, add them to your CV, use them to pay down premiums, or you can buy additional paid-up insurance. This is another way to increase your death benefit without having to go out of pocket. 

As you can see, there are many ways to make your insurance policy work for you. Once you determine which route you want to take, you can let that serve as a guideline for comparing life insurance illustrations. 

Compare Identical Options

If you’re looking at multiple insurance carriers (as you should), then you don’t want to complicate things by picking different policies. Make sure that your options are the same so that you can see how each company will fare over time. 

Ask For Lower Interest Rates

Once you get the initial illustration, ask your insurance agent to provide a projection with a lower interest rate (ideally about two percent less). This will give you a more conservative estimate so that you can plan better for the future. 

Contact NextGen Life Insurance Today

Even if you understand life insurance illustrations, the process of comparing them can be exhausting. Let NextGen Life Insurance do the heavy lifting for you. This way you can focus on what matters, getting the right coverage for you and your family. Call us today to set up a consultation.