I can’t tell you how many times I’ve warned people about the dangers of life insurance illustrations. I even spelled it out in a paper I wrote last year.
Most life policies are complex hybrids, part death benefit and part investment product, so I don’t blame agents or insurance companies for wanting to demonstrate how a policy “works” with an illustration. We all know a picture can be worth a thousand words.
Unfortunately, an inaccurate picture can be worth many thousands of dollars. And you might not know there’s a problem until you’re paying far higher premiums—or receiving a far lower relative return—than you were led to expect.
I’ll say it again: Do not buy insurance off an illustration.
Assumptions are the Core of Life Insurance Illustrations.
Now, InsuranceNewsNet has confirmed my warning with an article detailing the many ways insurance products have left consumers vulnerable to surprises: “Illustrations for policies designed for current, rather than guaranteed, assumptions have become even more problematic in the past 15 years … It shouldn’t surprise readers to see that hidden in the word ‘illustration’ can be an ‘illusion.’”
Life insurance illustrations are created with all kinds of assumptions about interest rates, inflation, and the performance of other financial products like stock and bond indices. Even if the illustration is based on “conservative” assumptions, it’s still just one example of the policy’s performance over a period of time.
It could be right—and it could be very, very wrong.
As the article explains: “Understandably, policy illustrations are unable to suggest likely, real world outcomes when constant crediting rates are projected 30 to 50 years in the future.”
Questions You Must Ask About a Policy
Before you apply for any policy, ask to see a sample insurance contract of the product being offered. If the agent or advisor cannot—or tries to dismiss your request to—present such contract before the actual application, I strongly suggest that you run for the hills.
Of course, reading the contract may require several hours with strong glasses and a legal dictionary, so here are some questions you can ask before you start:
- On a term insurance policy …
- Are the rates guaranteed?
- What happens if your health changes?
- On a universal life policy …
- Are the death benefit, expense charges and premiums guaranteed?
- What happens if projected rates of return fall?
- Is there a chance of the policy imploding?
- On a whole life policy …
- Are returns interest-sensitive?
- Does the policy pay dividends?
- Are term riders adjustable, removable, and convertible?
If you don’t think you’re getting clear, candid answers to these questions, do not sign anything. Seek immediate counsel from an independent, impartial advisor.
Get Advice from Someone who is Not Your Friend
You’ve probably bought insurance from a friend who is an agent, or someone referred by a friend.
Why? Because you feel you can trust them. But can you trust them to tell you all the potential pitfalls of a policy, even if it changes your mind about buying it? Will you be comfortable going back to them in a few years, if your policy performs poorly, to say, “This wasn’t what you told me would happen”?
That’s why it’s crucial to seek impartial, unbiased analysis of any life insurance policy—a candid evaluation from someone who has no vested interest in selling you anything.
I’ll help you pinpoint the strengths and weaknesses of your life insurance policies. And I’ll never let you buy a policy based on a life insurance illustration. Because I am not your friend.
Paul Katz doesn’t care if you like him. As the founder of Life Auditors, he stays objective to help you reach your financial goals, and sells no financial services of any kind. His advice is completely impartial.