What is an Illustration?
How to understand this valuable life insurance tool and how best to approach it
If you practice the Infinite Banking Concept in your life, you’ve probably seen a life insurance “illustration.” If you’re learning about the (IBC) and intend to implement it in the future, you will see one in the future. You might have heard me, Carlos Lara, Bob Murphy, or James Neathery mention one in one of our podcasts (The Lara-Murphy Report or Banking with Life). Bob Murphy tells crowds that a major reason behind the publication of his and Carlos Lara’s The Case for IBC was to explain how to read a life insurance illustration. There’s no question, illustrations are important and should be thoroughly understood, but their usefulness is limited.
What is an illustration?
A life insurance policy illustration is a summary of a proposed or in-force life insurance policy and its features, including premium levels and limits and projections of values based on the current experience of the company. Illustrations for dividend-paying whole life insurance are typically 12 to 18 pages long. Several of those pages contain definitions of important life insurance terms, e.g. premium, cash surrender value, face amount, rider, etc. Readers of this blog will already be familiar with many of these. Other pages contain “the meat” of the illustration, which consists of a detailed enumeration of the various premium levels (for the base, a term rider if there is one, and the Paid-Up Additions) and a financial projection presented on an annual basis of things like premium level, cumulative premium, dividends, increases in cash value, net cash value, and death benefit.
Is there a website where you can input your information and get an illustration?
No. Life insurance illustrations are a product of many things, perhaps the least of which is “the numbers.” On the one hand, this consists of underwriting status, which can only be determined on an individual basis after the submission of an application for life insurance and the initiation of the formal underwriting process. Illustrations shown prior to underwriting merely assume a certain underwriting rating that may or may not change in formal underwriting. On the other hand, the substance of the illustration — the projections — are customized to every individual’s life and should only emerge after a detailed conversation between the individual and his or her agent about the individual’s financial experience and goals.
Well-designed illustrations take a significant amount of time to produce — or at least they should. Therefore, an agent shouldn’t be so quick to “throw together” one or more illustrations. Numbers can be made to do all sorts of things on the page, and while an illustration may appear actuarially valid from a technical point of view, it may not be the best solution in practice. Finally, once a policy is in force and the seven-day free-look period (where you have the right to refuse to accept the policy, thereby terminating it) has passed, the policy design cannot be changed. To get a policy with a different design would require getting a new policy (and everything that entails, like going back through underwriting). In other words, the illustration design and review process should be treated less like window shopping and more like reviewing an architect’s proposed blueprints for the remodel of your home.
Can I compare illustrations from different companies?
You should be very careful in comparing illustrations across companies, especially if you are referring to the numerical projections. Different companies have different terms that regulate the use of various policy features. One example is the Paid-Up Additions or PUA rider. Some companies will only allow you to increase or decrease your PUA premium by a certain percentage, say, for example, 20% in either direction. Any more than that and the rider may be eliminated from the policy. Therefore, in my view, this inflexibility should be taken into account when examining the projected values. While a monetary price for that inflexibility will not appear, it should be considered right alongside other policy features.
There are other important elements, the significance of which may not immediately leap off the page of an illustration. One of these is whether a particular company is a direct-recognition or non-recognition company. A direct recognition company “directly recognizes” outstanding policy loan balances by reducing the dividend paid to a policy owner in the event that the policy owner has an outstanding policy loan balance at the end of the year. Non-direct recognition companies do not. If an individual is “banking” according to the IBC and runs an outstanding policy loan balance from one policy year to the next, the dividend will be lower than it otherwise would have been. This will reduce the growth in the cash value (if the dividend is directed back to the policy through PUA premium).
Proponents of direct-recognition companies will claim that the dividend that does get paid is higher than those paid by other companies. The higher dividend balances out the dividend reduction effect due to maintaining an outstanding policy loan balance. This may or may not be true. The point is, however, that whether a company practices direct or non-direct recognition is a non-numerical feature that must be considered in conjunction with the values on the page.
How dependable are illustrated projections?
There’s a saying in our industry that goes like this: “as soon as the illustration is printed, it’s wrong.” It’s important to keep in mind that illustrations are based on current company experience — current mortality expense, current overhead expenses, current investment performance, etc. If anything is certain about the future, it’s that it will be different than the present. As these values change, the actual performance of policy values will vary with what’s been previously illustrated.
Part of my goal in this blog post is to put illustrations in their place. There is a perception out there that all that an individual needs to do is see an illustration in order to make a decision about whether to implement IBC in a certain fashion. We have to dispel this notion. Far more important is the individual’s understanding of why policy values change the way they do and how an individual’s own behavior will impact those values, arguably to a greater extent than that of any other party. In other words, it would be far better for an individual to establish a relationship based on trust and education with an agent, for him to gauge the agent’s competence accordingly, and then to review an illustration as opposed to the reverse.
At a minimum, major discussion points in that conversation should consist of your financial situation, the structure of the premium, the justification for the structure, the flexibility in the premium structure, the company’s openness to the IBC, the company’s organizational status (mutual or stock company), and the company’s financial history and status. Many of these elements either do not appear or are not immediately obvious on life insurance policy illustrations.
Let me be crystal clear, I have turned potential clients who want to jump right to illustration review away — and I will continue to do so.
Making financial decisions based on illustrated, numerical values that will change alone is unwise, and the practice of selling from the illustration (which means to pitch a client on the basis of an illustration alone) indulges this lack of wisdom. It may be financially expedient, but it is neither appropriate nor sustainable.
When is the right time to review an illustration?
My advice is to do several things before consulting an illustration. First, educate yourself. Read this blog. Read Becoming Your Own Banker. Watch my and James Neathery’ review of Becoming Your Own Banker on YouTube. Understand how the IBC integrates with the rest of financial strategy. Learn the asset itself. Learn what premiums are and how they differ, learn about cash value and how it relates to death benefit, learn about the industry and the companies with which Nelson recommends you work. Keep going until you can’t ask questions that you don’t know the answer to.
Second, start practicing financial discipline. If you cannot beat the daylights out of Parkinson’s Law (“expenses will rise to meet [or exceed] income”), then looking at an illustration is literally a waste of everyone’s time. This means saving. Shoot for 25% of gross income. If you can do this, you will become an Infinite Banking beast and the illustration will be a minor component in your success.
Third, initiate a relationship with an Authorized IBC Practitioner. That means looking for agents who are listed on this website (this is my profile). There are hundreds of thousands of licensed life insurance salesmen and every single one of them will claim that they can design a “banking” policy for you. They might even be genuine in making this claim. Maybe 400 or less of those hundreds of thousands have gone through the NNI training program. If you’re going to get heart surgery, would you go to a dentist? I mean, they’re both doctors, right? No. If you want a specialized service performed correctly, you seek out a professional who specializes in performing that service. I have heard too many stories and seen too many mutilated policies that were sold as “banking” policies. Let the people who think conventionally about finance go to the people who offer conventional financial services. You should select someone who specializes in what you want.
This will mean reaching out by email, through a practitioner’s website, or over the phone. Expect to meet either digitally (through video call), in person, or over the phone, two to three times — there are as many protocols as there are agents, and some clients require more attention, some less. Whatever questions you have remaining, get them answered. Ask about the process. Ask about the company they use and why (maybe you even ask about direct vs. non-direct recognition). I repeat, get your questions answered. You want a relationship with an agent who will listen to your questions and answer them so that the underlying concept makes sense to you. That said, do your own homework. You wouldn’t expect a doctor to keep you totally healthy — you need to eat right and exercise on your own — so don’t expect an agent to do all the work for you either. Plus, there’s no harm in comparing what you hear from an agent to what you learn elsewhere.
Fourth, now consider an illustration. If you know the mechanics of whole life, the unique “IBC style” design, and the meaning of the various terms incorporated in the illustration, then illustration review is almost effortless. And by the way, the only way an agent can know whether you understand what you’re getting into is if you have those initial conversations first. This is why “selling from an illustration” is inappropriate. The agent has no idea whether the individual understands what he’s looking at. The financial advisory community is lambasted constantly for selling to an uninformed public and IBC Practitioners shouldn’t be a part of it. Nor should individuals seeking to implement the IBC complain about an agent who wants to confirm that education first. Maybe this effort will take more time. So what. You’re changing your entire attitude and philosophy towards finance — take the time to get it right.
Keep in mind that illustrations can be changed. If you’ve gone through the process I recommend above, then there will likely be few to no changes. But if any are required, request that they are made. Once you’re satisfied, the next step is applying for life insurance — a subject for another time.
Life insurance policy illustrations are policy summaries. They contain definitions and numerical projections based on the current experience of the company. They illustrate the performance of a particular policy design over time, again, based on current experience. Illustrations take time to design and should be tailor-made to the particular individual’s situation. This is why there is no online “quote generator” that pops out IBC illustrations — nor will there ever be one. Furthermore, actual values will differ from what’s illustrated.
There is much more going on in an IBC policy besides “the numbers on the page.” An individual getting into IBC should understand the contractual rights, the meaning of the various elements, the nature of the industry, and much more —none of which is embodied in the numbers. Therefore, it is inappropriate for the public to select policies for purchase based on illustrations alone. In fact, my position is that it’s best to review illustrations only after the agent is confident in the individual’s educational foundation. This is the only way to ensure that agent and individual are on the same page, and if expectations are appropriately aligned, this will be in both the agent and the individual’s best interest.
There is basically nothing online about illustrations and how to approach them from the perspective of the IBC. Now there is! I hope this has been helpful to you.