Life insurance basics, Part 5
FCW's Friday Financials column offers a clear picture of what a 'policy illustration' is all about
A life insurance salesman may show you a "policy illustration" to explain how your policy works. Here's some further explanation:
What does an insurance policy illustration show?
A policy illustration shows premiums, death benefits, cash values and information about other factors that may affect the cost of the policy. Your policy may provide for dividends to be paid to you as either cash or "paid-up" insurance. Or it could provide for interest credits that could increase your cash value and death benefit or reduce your premium. Dividends and credits are not guaranteed.
Your costs or benefits could be higher or lower than those in the illustration because they depend on the future financial results of the insurance company. With variable life, your values will depend on the results of the underlying portfolio of investments. However, when figures are guaranteed, the insurance company will honor them regardless of the underlying financial success.
Ask your agent which figures are guaranteed and which are not. If the illustration is for a variable life policy, be sure that the interest rate assumed is reasonable for the underlying investment accounts to which you would allocate premiums. For example, a higher interest rate may be warranted if you select a stock account; a lower rate should be assumed for more conservative alternatives.
Is a policy illustration a legal document, like a contract?
No, an illustration is not a legal document. Legal obligations are spelled out in the policy itself.
What else should I look for in a policy illustration?
- Is it based on recent experience?
- Is the classification shown appropriate for you (i.e., smoker/nonsmoker, male/female)?
- When are premiums due annually, monthly or otherwise?
- Which amounts are guaranteed and which are not?
- Will you be notified if the non-guaranteed amounts change?
- Does the policy have a guaranteed death benefit, or could the death benefit change depending on interest rates or other factors?
- Does the policy pay dividends or provide for interest credits?
- Are those figures incorporated into the illustration?
- Will your premiums always be the same?
- Could the premium increase significantly if future interest rates are lower than the illustration assumes?
- If the illustration shows that you will not have to make premium payments after a certain period, is there any chance you would have to resume payments in the future?
- Is the premium level sufficient to guarantee protection for your entire life?
What if I become disabled and can't pay the premiums?
Provisions or "riders" that provide additional benefits can be added to a policy. One such rider is a "waiver of premium for disability." With this rider, if you become totally disabled for a specified period, you don't have to pay premiums for the duration of the disability.
What happens if I fail to make the required premium payments?
If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium with no interest charged. After that, if you have a permanent policy, you can authorize the company to draw from the policy's cash value to keep the policy in force. In some flexible-premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values and a shortened coverage period.
Are other riders available?
Yes. An "accidental death benefit," for example, pays an additional benefit in case of death resulting from an accident. Some companies provide "accelerated benefits," also known as "living benefits." This rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care or confinement to a nursing home.
When will the policy be in effect?
The date that insurance goes into effect could be different from the date the company issues the policy. If you decide to purchase the policy, always check precisely when the insurance becomes effective.
Is a "buyer's guide" available?
Most states require companies to give consumers a buyer's guide to help them understand life insurance terms, benefits and costs. Ask your agent for a copy.
Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at email@example.com.
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