Life Insurance Annual Statement vs. In-Force Illustration

The life insurance annual statement is what most policyholders rely on to know their policy is in good standing. It is automatically provided by the insurance company for most policies and appears to provide pertinent information regarding the policy’s status.  However, as the case study below illustrates, reliance solely on the annual statement can lead to a false sense of security on a policy.  

The Insurance Purpose

One adult child was active in the family business and would inherit the business.  The other adult children were not involved in the business.  Life insurance held in trust would provide for their portion of family wealth transferred when the parents passed away.  Thus, life insurance served as a critical component of their overall family wealth transfer planning.

The Annual Statement Illusion

The annual statements were regularly reviewed and gave no appearance of issues with any of the policies.  They reported premiums paid in the past year, current cash values, policy earnings, and the death benefit.  The statement is a record of what occurred in the past year.  It generally doesn’t project how the policy will hold up into the future.*  This “rearview mirror” tool gave the illusion that all of the policies were in fine shape.

The In-Force Illustration Tool

In contrast to an annual statement, an in-force illustration provides an estimation of how the policy may hold up in the future.  It usually requires the agent or policyowner to request the illustration rather than being automatically generated like an annual statement. The in-force illustration provides a projection of your policy’s future performance based on a set of  assumptions, such as interest rates, policy charges, and premium payments. Key features include: future cash value and death benefit projections, assumptions about continued premium payments, potential outcomes under different premium funding or policy earnings scenarios.

The In-Force Illustration Enlightenment

After requesting and reviewing in-force illustrations for the life insurance portfolio, it was determined that many of the policies in the portfolio were in trouble.  Over half of the policies were projected to terminate prior to life expectancy.  Some policies required doubling of the premium while one required an 8x increase in premium to extend them to desired coverage windows.  On the positive side, one policy was identified where premiums could be stopped earlier than planned.  

The Outcome

In this case, there was a happy ending.  The clients were insurable and young enough to qualify for insurance, so they had options beyond just their existing policies. The end result was a combination of reconfigured existing policies and new coverage designed to ensure the family’s wealth transfer goals involving the insurance would be provided for safely and securely long into the future.

The Takeaways:  Know What Your Tools Do

When managing a life insurance policy, it is important to have both an annual statement and an in-force illustration. While both are important, they serve very different purposes and offer varying levels of detail about the health and performance of your policy.

• An annual statement is a look in the past.  It’s a good verification tool of actions taken in the past year and snapshot of values at the policy anniversary.  It’s also good at showing where cash values are allocated in policies that allow you to choose how the cash value gets invested.  That’s about the value of it.  It’s something that is sent automatically for most permanent policies around the anniversary date.

• The in-force illustration is the tool to use to know if the policy is going to meet your objectives long term or if you need to consider making adjustments.  It is something you have to request from the insurer or your agent rather than something that is automatically generated.  While it may not be needed every year, it’s worth getting at least every few years to know where things stand.

Leveraging these tools can help you stay on top of your life insurance policies and avoid unwelcome surprises.  Make them a part of your life insurance routine or anytime there’s a significant change in interest rates, premiums, or personal financial planning needs.

*Special Caution: Some annual statements may contain sentences that indicate how a policy may hold up over time. It has been our experience that these are often wrong or use inaccurate assumptions in their calculations.  For example, sometimes they double count premium payments in the assumptions. You should always verify future performance information shown in a statement with an in-force illustration.

This case study is based off the actual experience of a client and is for illustrative purposes only. Each client’s experience will vary.