Many people have trust issues with investment and insurance products, and adding to that, the investment brokers and the insurance agents. That’s obvious when many policies offer big promises but lesser benefits. Getting a realistic picture of how a life insurance policy or any other scheme will perform over a time period is essential. That’s where illustration in life insurance plays a role. It’s hypothetical, but a detailed projection of the potential performance of your life term policy.
In this article, we will explain why understanding life insurance illustrations is important.
What is Life Insurance Illustration?
The term ‘illustration’ in itself means a visual or a picture depicting something. In life insurance, an illustration refers to the demonstration of how a particular life term insurance policy works during a certain timeline.
It is a comprehensive document explaining that the policy’s values and benefits are expected to change over the years, under different conditions. Life insurance usually has a fixed and a variable payout. It is a prediction that markets will impact your policy’s rates of interest and thereby impact the returns of variable components.
A life insurance illustration document must indicate -
- The premium amount you will pay for what tenure
- The death benefits that the policy offers, that is, the assured payout amount your nominee shall receive,
- Any fee to be deducted, such as mortality charges, penalties, or fines for missing any premium or any other charges related to administrative costs,
- The expected cash value in case of savings or investment-linked insurance policy, such as ULIPs (Unit Linked Insurance Plans), including the bonus rates, dividends, and investment returns, if the market performs as predicted,
- If the policy allows loans or withdrawals, then how will these transactions affect the policy’s performance?
- If the policy can have riders (increased coverage for additional costs), then how will it impact the premium schedule and the policy’s performance, and
- The surrender value — the assured minimum amount you will get if you surrender the policy before its maturity.
- Although a life insurance policy illustration is just a hypothetical roadmap and doesn’t represent precise returns, especially for the investment components, it gives an idea of the end result of an insurance policy. There are some ‘non-guaranteed returns’, such as returns through investment units and dividends. While the ‘guaranteed returns’ include assured cash value for death benefit, or surrender value. The former may fluctuate, but the latter remains fixed, irrespective of market performance.
Why is Life Insurance Benefit Illustration Important?
With the illustration of life insurance policies, the users will be better able to choose the policy that can align with their goals! Here are the benefits of life insurance illustration — reasons why you must check them.
A standard benefit illustration in life insurance prevents agents or third parties from mis-selling by guaranteeing high-end results. No fake promises, no hidden charges, no secret terms and conditions, but a document stating the guaranteed vs non-guaranteed benefits in life insurance.
You make an informed choice with all pre-hand information of the premium schedule, costs, risks, and returns. It helps in managing your expectations, where you don’t set overly optimistic assumptions to be surprised later. To get a clear view and have no fake assumptions is why a benefit illustration is important.
A sample life insurance illustration helps you understand the actual policy benefits and visualize your future. Do you want to go for a traditional policy, ULIPs, or something else? Do you seek more protection and look at the cash value of life insurance’s death benefit, or do you also want to enjoy the investment benefits while living? Insurance benefits explained in an illustration help you answer your questions, compare policies, and decide accordingly.
As per the Insurance Regulatory and Development Authority of India or IRDAI rules, it's mandatory to present an illustration in a life insurance policy for customers. If an insurance company provides the illustration document, you can trust that it complies with the legal norms and is also transparent with its customers.
Also Read: What is an immediate annuity plan?
How is Life Insurance Illustration Created?
Insurers used advanced tech, specialized software, and now, maybe even AI (artificial intelligence) to create life insurance illustrations. The financial projections are illustrated by taking into consideration certain factors like the policyholder’s age, the desired coverage amount, the premium amount they can pay, and at what frequency, etc. These illustrations analyze and compare different policies to educate customers about the utility of each.
Wrapping Up
Illustration in life insurance outlines policy’s details and features — premium payment structure, the corpus it will accrue, extra riders if any, any loan or withdrawal facility, and the benefits and returns the policy has the potential for. However, you must note that it is a financial projection but not a guaranteed future. Please consult with a life Insurance advisor before making any decision.
FAQs
What happens if the returns from a life insurance policy do not match the benefit illustration? Is it legally binding?
A life insurance benefit illustration is only a projection and not a guarantee, but all policies have guaranteed and non-guaranteed returns. While non-guaranteed returns can’t be challenged, insurers are legally bound to provide the guaranteed returns.
How to read a life insurance illustration document?
Start with policy details like policy term, premium amount, and frequency, attached riders, loan facility, permitted number of withdrawals, and charges. Then, look at surrender value, death benefits, and other such guaranteed returns. Then, check out the non-guaranteed benefits based on assumptions of interest and inflation rates.
Do all insurers provide their customers with a life insurance benefit illustration?
Yes, they must provide the life insurance policy illustration, as per the IRDAI norms. You can challenge them if they don’t.
How to check if my financial goals align with a life insurance policy?
That’s what an illustration in a life insurance policy is for! You know your goals, and a policy’s benefit illustration is a tool to check if the benefits align with your goals.
Can I trust the life insurance illustration completely?
No, only partially! You can trust the guaranteed returns completely because it is legally binding for insurers, while the illustration for non-guaranteed returns is only a financial compass, not a contract.
Can my life insurance policy lapse?
Yes, certainly — if you fail to pay the premiums within the grace period. While some insurers allow revival with payments of overdue premiums and fines, some don’t.
What happens if my life insurance lapses?
If your life insurance policy lapses, the insurer ceases all your benefits - no death benefits, no claims, no returns. You may get your paid money back at surrender value, which is a lower amount than the total of your premiums.
