Avoid the insurance illustration trap

Making illustrations work for you

If you keep all of these factors in mind, there are ways to make illustrations work for you.

First, agents are required to give you all of the pages of the life insurance illustration, including the one with the Interest Adjusted Net Cost (IANC) indexes. These "box scores" for each policy take into account the premiums paid as well as the time value of money. They give you the cost per $1,000 for both guaranteed and projected death benefits (for term and permanent policies) and for the policy's cash value (for permanent policies).

You can use these indexes to compare different policy illustrations in an apples-to-apples way.

Video: How much life insurance is right?

Ask for the payoff projections

When comparing illustrations, you should always ask for projections that show the payoff if current interest rates continue into the future. Then you should ask for a second illustration that shows the payment if the rates drop by 2 percentage points. It is surprising how much the numbers differ when the scenarios change. This is especially important when comparing policies from different companies. Go for the policy that looks best at the lower rate. That is probably the most conservative company, and therefore it has a better chance of meeting its projections.

Ask your agent for an illustration questionnaire from The American College for all companies you are considering, and then ask the agent to explain the information to you.

If your agent doesn't know what the IQ is or can't explain what's on it, you should buy from someone else. If an agent talks to you about variable life insurance, he or she must have a National Association of Securities Dealers license, because that's considered an investment product. Sometimes unlicensed agents discuss the product with prospective clients and then have a licensed agent actually sign the application and submit it.

Finally, remember that clothes may make the man, but illustrations don't make the company. Illustrations offer only a glimpse into how well a company thinks (or wants you to think) its policy will perform for decades to come. By knowing what illustrations to ask for, how to compare them and what your agent should do, you will maximize your chances of picking the right one.

Updated Sept. 23, 2009

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