Virtually every life insurance product is sold with an “illustration”. These illustrations often become the framework of client understanding and the pivotal selling point for the broker. But illustrations are just that, pictures of events that might be. Not contractual outcomes.
The more creative the picture (and picture-maker), the greater the likelihood of misleading conclusions about a policy’s merit and future performance.
This picture of information is merely a reflection of the illustrator’s assumptions and is therefore virtually meaningless in any true measurement of actual performance or even as a useful tool in comparing products.
Illustrations show various numbers and values related to the policy (such as the premium amount, death benefit, cash values, etc.) that are presented for every year as far out as suits the conversation. In a non-guaranteed scenario, a policy’s financial performance depends on a series of costs (which may or may not be guaranteed) and annual rates of return (which cannot be known). These pages of numbers therefore, are often not factual projections of future performance. It becomes essential then, for a true understanding of any illustration, that there is full disclosure of the input factors and the underlying factors of performance. The unfortunate truth is that the broker generally understands very little of the technical underpinnings that drive that performance.
The value of a policy’s performance can only be determined when considered in context and in comparison to the competitive alternatives.
If a product is being illustrated showing extraordinary performance as compared to the alternatives, one might ask “Based on what?”. The insurance companies are investing their funds in mass pooling that will generate certain returns. Period. With what magic wand would this product produce returns differently, given the same market conditions? Or is it more likely that your illustration is not representing a fair comparison?
Life insurance, like any financial product, is defined by a set of costs, tax rules and rates of return that influence the cash values. Each company has their own operating policies (the contract) that will influence those details. It becomes relatively straightforward then, to compare products and even categories of product when those details are made clear.
With proper analysis the issues can be identified, addressed and resolved with facts. Using math based analysis and considering contractual details, insurance products can be measured and compared against each other and non-insurance investment alternatives.
This analysis can and should be done but rarely is the broker equipped to engage in that depth of performance analysis (unless his specific background in Finance or Math gives him those qualifications). Generally speaking, the persons with those qualifications are working on the other side of the equation, for the insurance companies with a mandate to make sure profits increase.
So where does that leave you? Somewhere between the real knowledge (the actuaries inside the insurance company with a mandate to make sure the products they sell are profitable) and the commissioned sales person in front of you. Which of those two do you think has only your best interest at heart? Which of those two is looking to make sure you have all of the information, not just the rosy picture?