When it comes to evaluating life insurance contracts for a potential purchase, a common tool used in analyzing policies is what the industry calls an “illustration.” The illustration is several pages of policy feature details and numerical details projecting policy values to the maturity date of the policy (generally the insured’s age 120 for policies issued since c. 2006).
But some have suggested that these so-called product illustrations should not be used to compare one policy against another and cite numerous sources who allegedly agree with their aversion to such a use for illustrations.
Should you be wary of a comparison that uses policy illustrations to make definitive or initial comparisons among possible products? And if these illustrations aren’t used to make comparisons, what does one use to discern the differences from one policy to another?
We use Illustrations all the Time
I’ll start today’s discussion by laying my biases on the table for all to see.
We make heavy use of illustrations to analyze policies and various policy features. We also spend considerable time adjusting allowable assumptions behind policy illustrations to further strengthen our conviction behind company superiority in a category.
And we’re certainly not alone.
Numerous illustrations are used frequently to compare policies and their functionality against each other. Prior to the death of Roger Blease and the closure of his company, Blease Research annually updated illustration projections to compare whole life and universal life products offered by several life insurers.
Where the Warning Originates
Those who sound the alarm against using policy illustrations make vague references to the Society of Actuaries and, sometimes but not often, even more vague references to the National Association of Insurance Commissioners (NAIC).
Keep in mind neither one is a regulatory body with any authority to enforce rules, but they both play an important role in shaping policy and their authoritative position on subjects related to the development of insurance law should not be discounted. This is likely why those who choose to make this argument use them as sources.
So what is the actual guidance?
I’ve been in the insurance industry for sometime now, but admittedly I’m nowhere near the longest serving agent in the country (not even my hometown) but I’m certainly well regarded as a student of the industry and spend careful time familiarizing myself with rules and regulations as well as general industry concerns or unwritten practices.
I’m aware of no current universal aversion to the use of life insurance illustrations as a means to compare policies.
Doing a little digging produces commentary from the early 90’s (as expected) on the subject during the formulation and adoption of the NAIC’s model regulation on life insurance sales illustrations. A little background information is in order.
It’s hard for some of us to remember, but a few decades ago (and for some insurers about a decade ago) the process of articulating policy benefits was a very pen and paper manual process. The development of computers and the streamlining of the benefit computational process led to a rather efficient process of generating policy numerical details…a disruption of sorts to join my generation in using that term.
This was great for life insurer’s ability to depict policy functionality, but it caused major concerns as there was no uniformity in how exactly insurers went about depicting this functionality.
Since insurers were bound by no specific rules about what they could or couldn’t “project” for policy values, some decided to be liberal in their future assumptions.
This paradigm set off a number of warnings from various industry experts and organizations attempting to head off potentially misleading sales tactics that could eventually damage the industry's reputation. The Society of Actuaries spent considerable time sounding the alarm.
This Newfangled Technology
Mixed in with the legitimate concerns of using this never before seen computational power for misleading purposes was the inevitable curmudgeon who views any advancement in technology making his or her life less than ideal as an evil to be eradicated.
It should come as no surprise to anyone that technology making one obsolete or exposing one’s shortcomings faces resistance. The life insurance illustration discussion is fraught with these people still today.
NAIC’s Model Regulation for Life Insurance Sales Illustrations
In the early 90’s the NAIC adopted model regulation that standardized life insurance illustrations to avoid (but admittedly not necessarily completely eliminate) the use of sales illustrations to deceive. The regulation was rather quickly adopted by 49 states and insurers tended to comply with regulation even where not necessarily required (as is usually the case).
Commentary on the subject of illustrations used to compare policies is largely quoted out of context these days as it’s taken from arguments made prior to the adoption of current law in the 90’s.
Regulatory Requirement to Compare through Illustrations
A few regulators now require information obtained from sales illustrations in order to complete necessary paperwork to transact a replacement of life insurance. The best example of this is NY’s Regulation 60 paperwork, which cannot be completed without both guaranteed and projected values obtained from policy illustrations.
The intention of the paperwork is to give the buyer at least one official chance to compare values side by side to ensure he or she understands the differences between contract benefits.
Let’s not be Luddites
Through advancements in technology we’ve come to analyze lots of things in rather complex ways.
Sometimes this analysis is well worth the pursuit, other times not so much. For many, a life insurance purchase can be a sizable commitment and careful time should be taken to review how policy features play out.
While life insurance sales illustrations are not the only metric by which one can or even should measure the worthiness of a potential life insurance contract vs. others it certainly should play a large role in the process.
The industry has standardized the projections of illustrations, and there may still exist some areas that avoid thorough scrutiny.
Indexed universal life insurance assumed index credit has been a main focus in recent years. But this doesn’t mean the industry is ignoring a problem or allowing the patients to run the asylum.
Anyone who suggests that there’s just too much intricate detail ignored by life insurance sales illustrations to make a meaningful comparison across companies is either lying to you, himself/herself, or both.