We continue to see a disturbing amount of non-guaranteed life insurance illustrations that defy all logical explanation.
On a recent case, we reverse engineered the cost of insurance (COI) rates from a sales illustration and determined that based solely on the information that the company was disclosing, the COI rates were negative for more than a 20-year period in the middle years of the policy!
Now we are not suggesting that this company believes in reincarnation, but it is obvious that there are some undisclosed features that are dramatically boosting the apparent competitiveness of the illustration. The most likely candidate: an interest rate “bonus” that is included in the illustration starting in a certain policy year but nowhere on the illustration is any mention made of the fact that the illustration incorporates a higher rate than the stated credited rate.
Here’s a tip: If the year-over-year illustrated cash value for your client’s policy is growing at a faster rate than the stated interest rate (after adjusting for any premiums paid), then something is fishy. The insurance industry has a long track record of making illustrations look artificially attractive at issue – the companies certainly realize the undo importance that consumers place on illustration comparisons – and then having those unrealistic assumptions unravel as experience emerges.
If your client is buying a non-guaranteed policy, then obviously you have to look at illustrations. But you have to understand why one illustration is superior to another, and if you are simply recommending the “best” illustration on blind faith, then you are setting your client up for disappointment or perhaps failure – and you are placing a big target on your back for failing to recognize something that would be relatively easy for a sophisticated and independent insurance advisor to detect.
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