A policy or sales illustration is an educational tool that shows a prospective or new insurance policyholder how a life or disability insurance policy works. A policy or sales illustration factors in all a policy’s key details, including the applicant or insured’s age, gender, and underwriting class (the risk level used to determine premiums).
Breaking Down Policy Or Sales Illustration
A policy or sales illustration also shows the insurance product’s name, term, benefit amount, premium, cash values (if the policy has a cash value component), and projected dividends (if the policy is being issued by a mutual insurance company). The illustration will also describe any policy riders or options. A policy illustration shows how the policy’s value is expected to change over time and what assumptions those values are based on. A disability policy illustration will also show the waiting period before benefits become payable and describe the conditions that must be met for the policy to payout.
A policy or sales illustration is not a binding contract and does not guarantee how much a policy will be worth in any given year, except where values are explicitly stated as “guaranteed.” The illustration is largely an educated guess determined by a computer program based on the available information at the time the illustration is generated. The actual legal guarantees associated with the policy are contained in the policy’s contract.
Insurance agents provide applicants with a policy illustration when they are considering purchasing a life or disability insurance policy to show them the policy’s features and benefits. After the policy is issued, the agent will issue a new illustration based on the actual policy issued, since it may contain different assumptions than the illustration used in the application phase. For example, the applicant’s medical exam might have placed her in a higher-risk category than the initial sales illustration assumed, or she might have changed her mind about the amount of coverage she wanted to purchase.
The National Association of Insurance Commissioners (NAIC) developed a model policy illustration that many insurers use as the basis for their policy or sales illustrations, because it is easy to understand and that it contains all the information consumers need to know. It shows the product’s current guaranteed and non-guaranteed values based on how the policy’s underlying sub-accounts affect the policy’s cash value and death benefit, assuming a rate of return that is reasonable, given the client’s risk tolerance and market conditions. The policy illustration should also show any fees associated with the policy. Sales or policy illustrations are used with products such as whole life insurance, universal life insurance, variable universal life insurance, and long-term disability insurance.