You have purchased a life insurance policy and have paid the premiums for many years. Like most people, you’ve relied on the sales illustration and expected your policy to stay in effect until it expires and that no changes are necessary.

Life insurance policies are often bought (and sold) with the idea that they are “made and forgotten”. In other words, they will perform as expected and do not need to be monitored. If you don’t periodically review your life insurance coverage, you could end up with a policy that stumbles.

Permanent life insurance policies are complex financial instruments with many variables that impact the “performance” of the policy. Permanent life insurance policies that offer elements of cash value include: whole life insurance, universal life insurance, variable life insurance and indexed life insurance.

The performance of a life insurance contract is based on three fundamental elements:

• Earnings

• Cost of insurance

• Overheads

These components will have different names depending on the type of policy, and some policies have more components. Each of these has an impact on performance, in particular the accumulation of cash value and the length of time the policy remains in force.

You may not know how your life insurance with cash value made. Insurance companies and agents often do not discuss the impact of changes to these components. If there is a problem with the elements of the policy, you could end up with a policy that charges significantly higher premiums than originally expected or that ends before maturity.

What is an effective illustration?

An effective illustration is the only way to assess the potential future performance of a policy and see if any changes are needed to avoid problems.

A current illustration uses the current policy values ​​(cash value, death benefit, and loan balance) and projects future values ​​based on the following:

• Current earnings (interest rate / dividend that helps increase your cash value)

• Mortality (the real cost of life insurance to you)

• Tuition fees (insurer fees)

A life insurance company can change any of these policy elements at its discretion and is generally not required to disclose that it has made a change or what the change is. A current illustration will help you determine if any changes will affect your life insurance policy.

Term life insurance fonts do not require current artwork. Term life insurance policies provide a death benefit for a specified number of years. And on most term life insurance policies, the premium you pay is guaranteed not to change during the term. (Some term policies have premiums that increase over time.)

Why should you request an effective illustration?

The illustration of life insurance sales that you saw when you purchased the policy is based on income, cost of insurance, and expense charges which are held constant. This is the Achilles heel of life insurance policy illustration, as there is unlikely to be any fluctuation in interest rates, mortality costs, or overheads on a long period of time. Change is a certainty.

A current illustration helps you determine if you need to take action to keep your policy alive. You can compare the current artwork to the original sales artwork to see if the font works as expected. The projected values ​​you see now will often be very different from the originally projected values.

Ordering a valid illustration will avoid unpleasant surprises. For example, if your cash value is unexpectedly depleted by costs and fees, the policy could end sooner than expected. To avoid this, you may suddenly find that you have to pay premiums for a longer period – or dramatically increase the premiums you pay – to keep the life insurance policy in effect.

A small number of life insurance companies include illustrations in effect with annual statements. Annual returns from other companies will include projections of the number of years the policy will remain in force and, if applicable, the expected year the policy will expire. Most insurance companies don’t even include this minimum amount of information.

How to request a valid life insurance illustration

You can request a current illustration through your life insurance agent or directly from your insurance company. The request can be made by telephone or in writing. Some insurance companies will allow you to request current illustrations through a customer portal. The request must be made by the contract holder.

Your live artwork request should include the following scenarios based on current income rate, mortality, and expense:

• As is, based on your current premium payments which remain stable.

• Calculate the premium needed to endow the contract at maturity

• If you have a policy loan, ask for these scenarios: repay the loan, maintain the loan while paying interest out of pocket, and borrow future premiums and loan interest to pay the premiums.

• Other scenario (s) you are considering which could include changing the dividend option, taking out a loan, or partially withdrawing the cash value.

Your insurance company may say that they cannot provide a valid illustration. But be aware that insurance companies are required to provide a valid illustration current and future benefits and values ​​based on the insurer’s current illustrated schedule (showing your current premiums, rate of pay, cost of insurance and expense charges). This is required by the National Association of Insurance Commissioners model regulation on life insurance illustrations (model # 582).

Policyholders have the right to request an effective illustration each year and should receive it within 30 days of the request.

How to revise an effective illustration

Now that you have the artwork you requested, you might feel lost. Reading an effective illustration can seem like a daunting task. Some insurance companies will include a header or notation at the top of a current illustration describing the scenario. Most insurance companies do not provide any guidance. A qualified Financial Advisor someone familiar with life insurance can help you sort through the pages, but it can be difficult to find someone with expertise in this area.

In order to be able to interpret a valid illustration, you will need to take the following into account:

• Make sure you have received all the pages in the illustration (page numbers are at the bottom).

• The current illustrations will have the following columns for cash value and death benefits will reflect projections based on current rates of earnings, mortality costs and expense charges, as well as guaranteed values ​​which assume the rate of earnings. minimum (interest or dividends) and maximum costs (mortality costs and charges). There can also be columns for the median assumptions.

• The premium column will reflect the premium due each year. Some illustrations will include a net cash value on whole life insurance policies where the dividend option is used to reduce premiums.

• The cash value column under the current values ​​(assumptions). If the cash value peaks and then begins to decline, this is a warning sign that the policy is in jeopardy. The policy will expire when the cash value reaches zero (unless it is a guaranteed policy).

• The death benefit may also start to decrease when the cash value decreases on certain policies.

The cash value will begin to decrease when the policy costs (cost of insurance and expense charges) exceed the gains. Permanent life insurance policies are generally designed so that future higher insurance costs are offset by lower net amounts at risk for the insurance company. The net amount at risk is the death benefit less the cash value.

If your illustration shows a decrease in cash value, you’ll want to take action. Although the decrease may be far into the future, the sooner you fix the problem, the better. You’ll want to increase the premium you pay, as shown in the current illustration, making sure the premiums will propel the policy to maturity. The longer you wait to fix the problem, the more premiums you’ll have to pay later to keep the policy in effect.

Guaranteed universal life insurance policies are an exception. These policies generally do not accumulate any cash value. Their current illustrations will show the premium and death benefit to maturity in the guaranteed value columns.

It is important to request an effective illustration every two to three years, as the components of your policy will continue to fluctuate. You should also ask for a current illustration when considering changing the font. For example, if you miss a premium payment, take a policy loan, or make a cash withdrawal, check the current illustration to make sure you don’t have any unpleasant consequences.