We have recently seen a number of illustrations that highlight the importance of the oft-repeated mantra within the actuarial community: The Illustration is Not the Product!
Even though the Illustrations Regulation that was promulgated in the 1990s was intended to end the illustration games that were rampant, we have seen more and more illustrations that stretch the bounds of plausibility. And there is little doubt that your clients are seeing the same types of illustrations, for both new and existing policies.
When we reverse engineered the cost of insurance (COI) rates from an illustration on one recent case, we observed that the COI rates remained at a level $30 per $1,000 from age 80 through 99. While an implied mortality rate of 3% is fairly reasonable at age 80, it is absurdly low at age 99 – probably by an order of magnitude. That is, the actual mortality risk presented to the company by a 99-year-old is likely 10x greater than the COI rate that they are currently illustrating for that age.
So what? The real concern is that if your client is still alive beyond 80, the company most likely will be utilizing COI rates that match up with their actual experience rather than some pie-in-the-sky illustrations that were produced decades earlier.
While future mortality rates are of less concern if your client has a heavily funded policy that minimize the gap between the death benefit and the cash value (which is known as the net amount at risk and is multiplied against the COI rate to calculate mortality charges), they are of tremendous concern if your client has a minimally funded policy, as that will have tremendous sensitivity to increases in future mortality rates. Indeed, for these types of permanent policies, future mortality rates can be just as important or even more important than future interest rates.
At the end of the day, if you cannot explain why one illustration is better than another (e.g., superior investment performance, superior mortality performance, lower expenses, better policy persistency, company subsidies, etc.), then there is a good chance that your client could end up with a negative surprise should he or she live to an advanced age.