Policy Illustration
A policy illustration is a computer-generated projection provided by a life insurance company that shows how a policy is expected to perform over time under specified assumptions about premiums, interest crediting rates, cost of insurance charges, and other policy mechanics.
Policy illustrations are the primary tool insurers use to help prospective and existing policyholders understand how a life insurance contract is projected to behave over its lifetime. Regulators require that illustrations for universal life, indexed universal life, and variable universal life policies include both a current scenario — based on assumptions the insurer currently uses — and a guaranteed scenario — based on the minimum credited interest rates and maximum charges permitted under the policy contract. This dual-column format is intended to show the range of outcomes between best-case (current assumptions maintained forever) and worst-case (guaranteed charges with minimum crediting).
For whole life insurance, illustrations show the guaranteed cash value schedule and dividend projections using the current dividend scale, with a caveat that dividends are not guaranteed. The participating nature of whole life means that actual experience will differ from projections as the insurer's mortality, investment, and expense experience evolves. Regulators have historically scrutinized whether dividend scale illustrations were realistic given prevailing interest rates, and several enforcement actions over the decades have addressed overly optimistic projections.
The National Association of Insurance Commissioners (NAIC) adopted the Life Insurance Illustrations Model Regulation in the 1990s, which establishes standards for how illustrations may be prepared and presented. The regulation limits the interest crediting rate that can be used in non-guaranteed illustrations for universal life products to a cap tied to the portfolio yield of the insurer's general account. For indexed universal life, the Actuarial Guideline 49 (AG49) framework — updated to AG49-A and AG49-B in subsequent years — restricts the illustrated cap rates for index crediting strategies to prevent unrealistically optimistic projections.
A critical concept for any illustration user is that projections showing a policy performing well at current assumptions do not indicate what will actually happen. Interest rates, insurer expense experience, and mortality trends can all change, and a policy illustrated to endure to age 121 at today's credited rate may lapse decades earlier if rates fall or charges rise. Reviewing the guaranteed column of an illustration and stress-testing with intermediate assumptions is essential due diligence.
For policies already in force, in-force illustrations — produced using current account values and updated assumptions — provide a more accurate forward-looking picture than the original at-issue illustration. Policyholders can request in-force illustrations at any time and should do so periodically, particularly for interest-sensitive products like indexed universal life, to monitor whether the policy remains on track.