Life insurance and the power of the ‘illustration’

Allen Wastler

By Allen Wastler
Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
Posted on Oct 4, 2022

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Define what an illustration is and why it is important.

List the information about a life insurance policy’s potential growth that an illustration provides.

Point out the crucial role financial professionals play in generating and interpreting illustrations.
 
     

Life insurance offers many benefits. But some policy benefits can be hard to envision, as they are conceptional and ultimately materialize in the future. That’s where a life insurance policy “illustration” comes in.

An illustration is a document that lays out in visual form exactly what a particular kind of life insurance policy provides now and may provide in the future in terms of protection and other benefits. It is a powerful tool for analyzing and comparing the utility of different types of policies for particular individual situations.

“Life insurance is an unfamiliar subject for many buyers,” said Sam Eppy, managing partner at Levanti Wealth in Fort Lauderdale, Florida. “Additionally, many of those people are visual learners. Viewing an illustration remains one of the most valuable ways financial professionals can help educate their clients to guide them through the buying process.”

Why an illustration helps

To understand the usefulness of an illustration, it helps to understand the various benefits different types of life insurance offers.

First and foremost is protection. Life insurance provides a death benefit to help loved ones cope with the financial challenges of your passing. This can be especially important if that happens earlier than expected and your family must cope with the loss of the financial support you provide.

Basic term life insurance offers a death benefit for a specific period of time in exchange for a certain level of premiums. That’s a pretty straightforward arrangement and doesn’t require much to envision. (Related: 4 times when term insurance may be the answer)

Permanent life insurance offers more. Permanent polices, such as a whole life insurance policy, build up cash value over time, which can be a sizable and helpful resource in the future. Additionally, certain permanent policies may be eligible for any dividends from the insurance carrier. Dividends, while not guaranteed, when used to purchase paid-up additional insurance, can offer the opportunity for growth in cash value and death benefit. The additional insurance will also be eligible to receive dividends.

Since permanent life insurance policies cover an entire life (not just a specific period like term insurance), that growth can be substantial, but hard to envision.

And that’s where the illustration comes in.

What an illustration illustrates

An illustration will lay out how the cash value and death benefit are guaranteed to grow over the lifetime of the insured under the conditions set by the policy.

For instance, in a whole life insurance policy, the cash value grows at a rate guaranteed by the insurance company. The illustration of such a policy will, in table form, show that growth in that guaranteed cash value year by year as well as the guaranteed death benefit.

Additionally, an illustration will typically show non-guaranteed, potential future values for the policy’s cash value and the death benefit based on the company’s current dividend schedule if it were to continue at the same level for all years in the future.

You can see an example of such estimates below in a hypothetical illustration for a 21-year-old female nonsmoker in excellent health living in Massachusetts. The policy used for the illustration is a whole life policy with a $100,000 death benefit and a premium schedule lasting until the 21-year-old turns 65. On the left are guaranteed cash values and the death benefit. On the right would be the non-guaranteed values based on potential dividend performance, based on the paid-up additions dividend option, in addition to the guaranteed results.1 (Click on the image or here to see the full illustration.)

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An illustration will also provide information about:

Given the breadth and complexity ― and the inclusion of non-guaranteed values ― in a life insurance illustration, it is important to review it with a financial professional, who most likely generated it in the first place. They can explain the meaning of the various values based on the information provided and offer guidance on how it relates to your situation.

What does a financial professional need to generate an illustration? Generally, they need your age, smoking status, health status, and state of residence, and the amount of coverage you are looking to have.

From there, they can generate illustrations for a variety of policies. For example, whole life policies are available that can be paid up in as little as 10 annual premiums or as many premiums as it takes for the insured to reach age 100.

Illustrations can make the benefits of various types of life insurance policies apparent and comparable. You can contact a MassMutual financial professional to start investigating the possibilities. (Need a financial professional? Let us know or find one here.)

Discover more from MassMutual …

Is group life insurance enough?

How whole life insurance helps diversify your taxes

Whole life insurance: Criticisms and rebuttals

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Non-guaranteed values are neither estimates nor guarantees, but are based on the yearly dividend schedule. The dividend schedule is reviewed annually, and it is likely that dividends in future years will be lower or higher depending on the company’s actual experience.

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.