Life Insurance Illustrations

Last Updated 6/23/16

Issue: One of the many protections and disclosures available to life insurance consumers is the life insurance illustration. The illustration is a ledger that provides information to prospective or new policy owners on how the policy should perform given a specified set of parameters applied to the features of the policy. While the components of illustrations may differ depending on the type and complexity of the policy, there are a great deal of similarities that exist across policy forms. Items common to all life insurance policy illustrations include the benefits to which a policyholder is entitled, the premiums required to maintain the benefit, the expenses related to policy issue and maintenance, and the benefit and premium periods.

Overview: Life insurance illustrations are subject to the NAIC Life Insurance Illustration Model Regulation (Model #582). Model #582 states that its purpose is “to provide rules for life insurance policy illustrations that will protect consumers and foster consumer education.” It is applicable to all group and individual life insurance policies and certificates with illustrated death benefits exceeding $10,000. Exceptions to this include variable life insurance, credit life insurance contracts, and annuities.

The model allows the insurer to choose whether a policy form will be marketed with an illustration. For policy forms actively marketed prior to the effective date of the regulation, the insurer is required to identify the forms which will use an illustration in the sales process. Policy forms issued after the effective date of the regulation must include a similar identification at the time of filing. For any policy form identified as one not to be marketed with an illustration, the insurer is prohibited from providing an illustration for any policy using that form prior to the first policy anniversary.

The model defines three types of illustrations, a basic illustration, a supplemental illustration and an in-force illustration. The basic illustration is used in the marketing of the policy and shows both guaranteed and non-guaranteed elements of the policy. Among the guaranteed elements are policy benefits, premiums, values, credits and charges that are guaranteed and determined at issue. Each of these elements has a non-guaranteed counterpart in the basic illustration that is not guaranteed or not determined at issue. Using a universal life policy basic illustration as an example, the non-guaranteed elements include current death benefits, current fund accumulation and the cash value and premiums related to the current benefits. These values are subject to the minimum values provided by the policy guarantees and cannot provide values more favorable than the illustrated values based on the company’s actual recent historical experience.

In addition to the basic illustration, the company may provide a supplemental illustration that depicts only the non-guaranteed elements permitted in the basic illustration. The format of the supplemental illustration may differ from the basic illustration, but is still subject to the requirements for non-guaranteed elements defined for the basic illustration. The supplemental illustration must refer the policy owner to the basic illustration for guaranteed elements and other important information.

After the first policy anniversary, the company may choose to provide or the policy owner may request periodic updates on the policy’s performance. These updates are provided in the form of in-force illustrations. All aspects of the in-force illustration are similar to the basic illustration, including the listing of the age of the insured as the issue age plus the number of years the policy has been in force. 

Model #582 contains specific requirements concerning the inclusion of the basic illustration as part of the life insurance policy delivery process. The requirements essentially state that if the marketing of the policy includes an illustration and the policy is applied for as illustrated, the authorized company representative must submit the illustration, signed by that representative and the applicant, to the insurer at the time of policy application. If an illustration is not used in the sale of the policy, both the applicant and the authorized company representative must sign a form provided by the insurer acknowledging that no illustration was used. If an illustration is presented prior to application and is later revised before the policy is issued, the new illustration must be labeled “Revised Illustration”.  In all cases where an illustration is required, the policy applied for or issued must have an illustration accurately representing the policy and appropriately signed by the applicant or policy owner and the authorized company representative. The illustration must be provided prior to or simultaneously with the policy delivery.

To provide guidance to policies whose benefits are tied to an external index or indices, the NAIC adopted Actuarial Guideline XLIX (AG 49) on August 16, 2015. AG 49 was developed to bring uniformity to the illustrations of policies tied to an external index or indices by providing a reasonable cap on the illustrated credited rate. Uniformity across illustrates helps clients to more easily compare the policies of different companies.

Status: The NAIC encourages states to adopt model laws and regulations designed to inform and protect insurance consumers. The NAIC Life Insurance Illustrations Model Regulation (#582) provides rules for life insurance policy illustrations that will protect consumers and foster consumer education. Life insurance and annuities are regulated by state insurance commissioners. Accordingly, state insurance departments provide regulatory oversight to ensure that all companies under their jurisdiction abide by the standards defined in the model.

At the 2015 Fall National Meeting, the Life Insurance and Annuities (A) Committee created the Life Insurance Illustration Issues Working Group to explore enhancing the narrative summary required by Section 7B of the Model #582 to promote consumer readability and understandability, including how they are designed and formatted and accessed by consumers. The Working Group recommended, and the Life Insurance and Annuities (A) Committee agreed, to pursue the development of a short policy overview document as a way to enhance consumer understanding as contemplated by the charge.  On the NAIC’s June 19 Executive Committee Call, a Model Law Development request was approved to incorporate a short policy overview document requirement into Section 7B of Model  #582 to fulfill the charge.  The Life Insurance Illustration Issues Working Group plans to 1) work on revisions to Model #582 to require a short policy overview document; as well as 2) develop a policy overview “template” that would serve as a “best practices” document. The Working Group plans to complete its work by the 2018 Summer National Meeting.