A life insurance illustration is a tool that agents use to detail the various features of a proposed life insurance policy. These rather lengthy documents contain a lot of information and sometimes delineate information with multiple ledgers that differ slightly from one another. Today we are going to discuss why these different ledgers exist and what the insurance company is trying to tell you with them.
It's hard to imagine today with technology being what it is, but at one time we didn't have illustrations. Best we could get was a tabular detail of projected values if we sent away for one and were willing to wait a few weeks for it to arrive.
In some cases, agents constructed something similar to the rate book issued by the life insurance company. These were–at best–abbreviated depictions showing only a few years' of illustrated values.
Additionally, life insurance companies had no standardized rules to follow when it came to preparing what we now refer to as an illustration. So life insurers were left to be imaginative about what they should and should not depict in these documents.
This sounds more cynical than I intended it to sound. I merely mean to call out the fact that without clear direction, it was nearly impossible for one life insurer to adopt a policy of detailed information in an identical way another life insurer might.
Thankfully, regulators noticed the problem this presented and the NAIC developed model regulation adopted by…pretty much…all 50 states. This proposed state law unified the disclosure protocol for all life insurance policies that included a cash surrender value benefit.
This regulation came at a time when some agents were using various sales angles on whole life insurance to highlight non-guaranteed features of the product without disclosing that these weren't non-guaranteed features. In other words, a projection of policy versatility often led people to believe that these were guaranteed features and not entirely dependent on the payment of non-guaranteed dividends.
A lot of the laws that went into effect to unify illustrations sought to very specifically identify guaranteed and non-guaranteed elements of a policy proposal especially concerning the death benefit and what premiums the policyholder needed to pay to keep that death benefit.
The Basic Ledger comes with all life insurance illustrations. It breaks down both guaranteed and non-guaranteed projections of the policy, but it also stresses the guaranteed components. Especially important to whole life insurance, the Basic Ledger is an attempt to identify what the original death benefit of the policy is and what premium must be paid for what period of time to guarantee this death benefit remain in force.
The last sentence of that paragraph is critically important, but also assumes you understand a lot of subtle context about whole life insurance. It seems like it's fairly straight forward that whole life insurance with a death benefit of X requiring a premium of Y for Z years need little additional explanation. But keep in mind that whole life insurance often comes in the form of dividend-paying whole life insurance and dividend can dramatically affect future policy values.
Dividends paid to a whole life insurance policy can:
Often times these benefits of dividends manifest concurrently so a lot can be going on with a whole life insurance policy that happens because of the dividend. It's no wonder then that a normal person (those not engaged in selling life insurance) has difficulty decoupling what is a guaranteed feature of a whole life policy and what is the result of a dividend.
This fact is the main focus of the basic ledger. The Basic Ledger tries, though not always successfully, to explain what results one achieves through guaranteed features and what ones might happen due to dividend payments.
The Supplemental Ledger (which goes by a few different names depending on the company and the product) is the part of a life insurance illustration that seeks to show some of the versatility of life insurance products.
This ledger is where you'll find projections for things like:
The Basic Ledger often ignores any of the above depictions and simply assumes a scenario where the policyholder pays premiums for the entire premium paying period because the Basic Ledger wants you to understand that you have to pay the premium to guarantee the initial death benefit amount.
The Supplemental Ledger focuses on showing you the things you might be able to do with your policy largely due to the additional benefit gained from dividend payments.
Because the Supplemental Ledger differs in focus from the Basic Ledger, it's common for the two to contain different cash value and death benefit values at certain years projected. Even if the values looked at are the non-guaranteed values from the Basic Ledger. This doesn't make either ledger wrong.
Consider the following example:
He noticed that the Supplemental Ledger assumes he'll pay no premiums after the 10th policy year, but the Basic Ledger appears to assume he'll continue payments after year 10. The difference in cash value between the two policies begins in the 11th policy year.
In this case, the Supplemental Ledger is showing Frank that he could use some feature from the whole life policy to stop paying premiums. This could be because the agent assumed he would: pay the premiums with the dividend, pay the premiums with cash value, pay the premiums with a policy loan, or he'd trigger the reduce paid-up option.
Regardless of the option chosen by the agent, the Basic Ledger ignores this scenario and chooses to simply show Frank what non-guaranteed cash value he gets from the policy if he continues to pay premiums. The other thing the Basic Ledger wants to make sure Frank understands is that this proposed life insurance policy is a NOT a 10 pay policy that will only require 10 premium payments and then guarantee his death benefit forever.
The Supplemental Ledger, on the other hand, details how the policy unfolds from year 11+ if he chooses to use whatever feature stops him from having to pay premiums. The Supplemental Ledger details the effect this will have on the policy.
I want to take a moment and call attention to a very important thing here. While the Supplemental Ledger details versatility and the execution of various policy features, it almost always does it assuming the non-guaranteed scenario of the policy. This means it does not automatically show these features under a scenario where only the guaranteed elements of the policy take place.
It's often easy to lose sight of the fact that people buy life insurance for many different reasons. The Basic and Supplemental Ledger have to co-exist because the life insurance company has no idea what motivation one buyer might have.
While it is possible that someone might be in the market for whole life insurance focused more on its use as a supplemental retirement tool and have no real need for the Basic Ledger, there's still a lot of good disclosure found in that ledger. It acts as a reminder that should the buyer like the death benefit amount achieved by the premium he/she pays, he/she will need to continue paying that premiums if he/she absolutely wants to guarantee that death benefit.
For most people in the above example, the Basic Ledger is extra pages in an already too long document filled with lots of information they barely understand. You can't please all the people all the time. But we can try to make information the information found in a life insurance illustration a little less intimidating and that's what we try to do every day.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.