A Guide to In-Force Life Insurance Policy Illustrations

If you're like many people, you've probably bought your permanent life insurance policy and haven't given it much thought. You pay your premiums on time and, based on your sales illustration, assume your policy is still in effect and you don't have to worry about making any changes.

Unfortunately, this is not the case. Even though policies are often sold based on expected performance, numerous variables can affect the performance of your policy. If you don't review your coverage regularly, you could end up with a poorly performing life insurance policy.

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In-Force Life Insurance Illustrations

An in-force life insurance illustration is the only way to monitor the variables that impact your policy’s performance. This illustration makes it possible to predict future performance and determine whether you need to make any changes. It uses your policy’s current values and projects its future performance based on three main metrics:

1. Mortality, which is a calculation based on how much that policy will cost based on your life expectancy
2. Earnings on the cash value from interest and/or dividends
3. The fees charged by the insurer

Over the years, economic scenarios impact these variables. What’s more, insurance companies can change them whenever they choose, and they aren’t required to notify policyholders regarding those changes. An in-force illustration is how you keep tabs on these changes and on your policy’s performance.

The Different Types of In-Force Policies

When it comes to performance, not all life insurance policies are the same. As such, it’s crucial to examine your policy to understand what financial variables impact its performance. In-force permanent insurance policies with cash value benefits include:

• Whole life insurance
• Universal life insurance
• Variable universal life insurance
• Index life insurance

Whole life insurance is considered the most stable as the amounts to be paid are fixed and cumulative. Put simply, as you make payments over the years, the value of the policy grows. This enables you to take out loans against the cash value, such as for an emergency, children’s college tuition or other significant expenses.

Universal life policies cover the beneficiary for life but allow for more flexible premiums depending on your financial needs. That is, the value of the policy can be readjusted, up or down.

Variable universal life insurance policies are often the most complex in terms of performance. With these policies, you can use the cash values for investments by placing funds in a separate account or allocating part of the premium amount to various investments offered by the insurer.

There are other types of permanent life insurance, such as offerings that cover two people under the same policy. It’s also worth mentioning that term life insurance, which provides coverage for a certain period of time but at a lower cost, doesn’t require an in-force illustration. Regardless, it’s important to examine your policy carefully and understand the differences that might affect its future performance.

Do You Have Life Insurance In Force?

As stated, the only way to truly understand if your policy is in force is to look at the illustration. Some insurance companies offer an online form you can use to request your policy’s illustration. Otherwise, you can request it by phone or in writing.

Some insurers may say they can’t fulfill a request for an illustration. But according to the National Association of Insurance Commissioners, it’s the policyholder’s right to have access to an illustration of current sales generated by insurers, and the data must be provided within 30 days of the request.

When calling your insurance company, remember that the illustration must contain the following information:

• How much still must be paid to have access to the policy
• The policy’s current earnings, expenses and costs
• Projections for the coming years

If you’ve taken out a loan on the policy amount, it’s important to consider these variables as well, such as the amounts you’re required to pay by the end of the loan’s term and the necessary interest required to prevent a reduction on your benefit.

Another number that deserves highlighting is the cash value of the insurance. If that value is declining after reaching a peak, or if forecasts show that it’s expected to decline — even in the distant future — it’s time to take action. A decreasing cash value indicates an imbalance: The expenses and interest rates are higher than dividends and earnings. All that’s to say is that your policy could end up expiring much sooner than you expected.

What Makes a Life Insurance Policy Invalid?

Now that you have the information you need to make sure your life insurance policy performs well now and in the future, it’s a good idea to make sure everything else is buttoned up so that your benefit doesn’t go unpaid when it’s needed.

Inaccurate or falsified applications are one sure way to invalidate your life insurance policy. Lying or withholding information about your health, not updating personal information or simply putting wrong information on the application can void your policy. Additionally, making sure your beneficiary information is current will ensure your benefit is paid out when it’s needed.

And of course, making sure you pay your premiums on time is a deciding factor. Some policies are more rigid when it comes to payments while others are more flexible. Many insurance companies offer a grace period for late fees, so be sure you understand what those periods are so that you don’t end up with an invalid policy.