Life insurance is complicated. Even if you already have a life insurance policy, you may need to have a trusted advisor review it to make sure that it is still “in force”. A major part of reviewing policies involves in-force illustrations. Here we outline the who, what, when, where, why (and how) surrounding in-force illustrations and the best time for you to get one.
If an individual’s death would financially impact the people in their life, such as a key person partner, business, employees, child, parent, sibling, or spouse, it is highly recommended that they look into life insurance. A life insurance policy provides financial protection to dependents after one’s death. The death benefit can be used to cover expenses such as childcare, household payments, or debts.
Who should request an in-force illustration?
Not all life insurance policies require in-force illustrations. Term life policies have premiums that are set for a specified amount of years. In other words, if an individual purchases a 20 year life policy, the premium and death benefit will typically remain the same for those twenty years.
People who have purchased permanent insurance policies (e.g. whole life, Guaranteed Universal Life, Indexed Universal Life, etc.) should request in-force illustrations to ensure their policy is performing as expected. The performance of a permanent insurance policy varies based on components such as earnings and interest, overhead expenses, and the cost of insurance for the insured.
What is an illustration?
Upon purchase of a life insurance policy, the insured will receive an illustration. An illustration is a projection of how the policy will perform in the future. It is crucial to emphasize the illustration is only a projection and it based on the notion that earnings, expenses, and the cost of insurance will remain constant throughout the years.
The aspects of a permanent life insurance policy (e.g. death benefit, premium, lapse age) fluctuate based on economic factors, such as interest rates and overhead expenses. These aspects need to be monitored to avoid problems with the policy. If left unchecked, the policy may underperform or even lapse in the coming years.
An in-force illustration is a significant tool to help the insured understand the potential, more realistic performance of a permanent life insurance policy. Based on current earnings, overhead expenses, and the cost of insurance, an in-force illustration can detect any problems that have risen or may arise. Possible problems with a life insurance policy include the policy terminating earlier than expected or the insured needing to pay premiums for longer than planned to keep the policy alive.
It is recommended that the insured individual compare their original illustration to the most recent in-force illustration to ensure that the policy is performing as anticipated. If it is underperforming, action may need to be taken to address the problem(s). According to Forbes, an in-force illustration is paramount in helping the insured to avoid unpleasant, and unnecessary, surprises.
What are the different types of in-force illustrations?
There are various types of in-force illustrations that answer distinct questions.
- As Is: If the insured pays the current premium, until when will the policy last?
- Solve for Age: What is the minimum premium needed to get to 100 years old? To 90 years old?
- No More Premium: If the insured paid no additional premiums, when will the policy lapse?
When should in-force illustrations be ordered?
It is recommended that the insured individual requests an in-force illustration every two to three years. A policy owner is permitted to request an in-force illustration annually.
From where does the insured request an in-force illustration?
There are numerous ways to request an in-force illustration. The insured can request it from their insurance agent or from their insurance company through phone, in writing, or via a customer portal. The insured should receive their in-force illustration within 30 days of request.
Why does the insured need to order an in-force illustration?
In a Proformex Case Study, it was found that 31% of life insurance policies would lapse before the desired coverage date. Additionally, 53% of policy owners had a 25% chance of outliving their life insurance coverage. Proformex also uncovered that 69% of life insurance policies have not been reviewed in the past five years and 20% of these policies are likely to lapse during the next three to seven years. Josh Resnick, an author and lawyer focused on estate and business planning, spent nearly a decade reviewing hundreds of life insurance policies. Of these policies, Resnick concluded that, “…easily 90% or more were in trouble or soon to be in trouble.”
An in-force illustration is a proactive way to verify that one’s life insurance policy is performing as expected. If the insured has a chance of outliving their coverage or if the policy experiences a decrease in cash value, an in-force illustration is key in the process of identifying the problem and acting swiftly to resolve it.
At this point, the answers to the five W’s of in-force illustrations may have spurred some “How” questions. How do people know which life insurance policy is the best fit? How does the insured understand the information on their in-force illustration? How does the insured know if they need to make adjustments to their policy? Talk to our Principal Ron Bland to learn more about the ins and outs of life insurance policies and in-force illustrations. You can reach us at Ron@AEISAdvisors.com or 650.348.6234 x12.
Disclaimer: Any information related to compliance or other subject matters in this blog is intended to be informational and does not constitute legal advice regarding any specific situation. The content of this blog is based on the most up-to-date information that was available on the date it was published and could be subject to change. Should you require further assistance or legal advice, please consult a licensed attorney.