A whole life insurance illustration can be complicated for people who are not familiar with life insurance. The illustration shows a lot more about your insurance than the amount of money that you need to pay. Not only does it show the annual cost of your insurance, but the illustration contains a lot of projections regarding your future cash value and death benefit. It also projects dividend payments, which are a source of income from the policy and dividends differ between different insurance companies.
Why It Is So Important To Understand Your Illustration
Whole life insurance is an investment in addition to the death benefit it provides. Whole life insurance can actually protect your finances while you are still alive. The difference between different whole life insurance policies is much deeper than simply comparing the annual premium (which is essentially all you need to know to compare term policies of the same length).
As the cash value of the whole life insurance policy grows, owners are allowed to take loans and withdrawals from the policy. Owners can also take the dividend payments as income paid directly to them or buy more insurance with them, and they can also use the cash value to pay for the life insurance after a certain point in time (in most cases).
Because whole life insurance has so many features and options in addition to the death benefit, it is extremely important to understand the illustration fully before entering into a whole life insurance contract. There are a lot of factors to consider when you are analyzing a policy or comparing policies against each other. The illustration details the result of structuring your policy a certain way.
What Information Is Included In A Whole Life Insurance Illustration
Whole life insurance policies are a little bit flexible in the way that payments can be made into them, and with how the policy can be managed. Some people make larger than required payments in early years, and they stop paying into the policy after a certain point. Some people grow their policies by using dividend payments to purchase additional paid up insurance. These are all examples of how the same policy can be structured in many different ways, and this is important to keep in your mind when you are looking at a whole life insurance illustration.
The items that are included in the illustration are broken down year by year, and they include:
- Annual Premium- The amount of money in each year that the client is projected or required to pay into the policy.
- Guaranteed Minimum Cash Value- The illustration will guarantee a minimum cash value accrual for each year.
- Projected Dividend- Using current dividend rates the illustration will project how large the dividend will be each year.
- Projected Cash Value- based upon the dividend option chosen with the projected dividend rate, projected loans, and projected payments into the policy, the illustration will project what the actual cash
- Guaranteed Death Benefit- This displays the minimum death benefit that a life insurance company must provide given the premium payments that are illustrated.
- Non Guaranteed Death Benefit- This displays the projected death benefit given the companies current dividend scale and dividend options chosen for the illustration. While policy owners are likely to experience something similar to the projection, it is not guaranteed.
When looking at a whole life insurance illustration, take stock of what the minimum guarantees are. It is very important that you understand the difference between the guaranteed minimum and the projection. While most projections are conservative (and some policies do much better than the projection) only the minimum guarantee is what the life insurance company must provide.
Also consider how premium payments and dividend options can change the projections. Some people decide that they only want to pay into a policy for a certain number of years, and then use dividends to pay for premiums. Some projections include “dump in” amounts at a certain time, where an owner makes a large payment into a policy. Some illustrations may show loans being taken from a policy at a certain point. It is important to consider how changes to the dividend option or to the amount or timing of premium payments affect how the cash value and death benefit ultimately accumulates.
Always ask an agent or financial advisor to very clearly explain any points that you may have questions on. Illustrations are not easy to understand for people who are not accustomed to reading them. Always read them completely and make sure that you understand them thoroughly.
The Biggest Considerations
When you purchase whole life insurance you do so with one or more specific goals. It may be to pay the least amount of premium for a certain amount of death benefit, or your goal may be to own a policy that pays the highest return. The biggest takeaways from reading an illustration for someone new to whole life insurance should be:
- How much is the annual premium.
- How big is the death benefit over time.
- When will the policy project to have a positive net return (make money).
If you understand the basic points of an illustration it quickly begins to make sense. Never hesitate to ask for multiple opinions before purchasing a policy. While a term life insurance policy is “free to cancel”, a whole life insurance contract may have surrender charges during the early years, and you may not get all of your cash value back if you decide to cancel. You do still have a grace period on any purchase, but it is best practice to read and understand the illustration fully prior to buying a policy.