When you first buy a whole life insurance policy, you’re probably going to have some questions. How does cash value work? What are guaranteed and non-guaranteed benefits, and how are they triggered? Why are premiums higher than with term life? To help you understand the nature of your policy, your insurer will present you with something called a policy illustration. This document is not a contract. Neither is it part of your policy. That being said, it can be invaluable in helping you to understand your coverage.
To shed more light on this item, we turn to the team at New York Life (NY Life).
Defining Your Policy Illustration
Your policy illustration is a document generated by computer that acts as a timeline for your policy’s values throughout its lifespan. “Your illustration provides a year-by-year snapshot of a policy’s guaranteed minimum values and non-guaranteed values,” NY Life explains. “Specifically, it shows the premium outlays, guaranteed cash values, guaranteed death benefits and non-guaranteed cash values, and non-guaranteed death benefits based on the company’s current dividend scale, which is not guaranteed.”
A dividend scale is a snapshot of future dividends the insurer expects to distribute across a defined batch of policies. Allbusiness notes that accuracy “depends on the actual future mortality, investment, and expense experience being the same as that of the projected dividends.”
If you are concerned about the accuracy of dividend scale, check past payouts along with the dividends the company is currently paying. (Still not a guarantee, but it gives you a better picture.)
Pointers For Reading And Making Sense Of It
While it helps to define a policy illustration and understand how dividend scale works, it’s also important that you don’t get bogged down in the jargon. NY Life suggests these pointers for walking away from your policy illustration with a thorough understanding.
First, review the entire document, starting with the proposal page. “This page identifies the type of policy, face amount, premiums and other relevant information,” NY Life notes, adding: “The rest of the illustration consists of columns that show changing values year-by-year.”
This is an excellent snapshot of your financial benefits over time.
Secondly, know the difference between guaranteed and non-guaranteed cash values. Self-explanatory in a sense, but guaranteed means that you will get that cash value added to your total no matter what as long as policies are paid on time and you haven’t borrowed against it. Non-guaranteed cash value is what the value could be provided the company continues to perform up to expectations. The sum of these (G and N-G) is your total cash value, and it’s what fluctuates depending on the dividend scale.
Finally, ask questions of your agent. “An illustration can be fairly complicated, so keep in mind that the only dumb question is the one you don’t ask,” NY Life reminds us. Seriously, that’s what your agent is there for, and insurance is too important to be left in the dark. Don’t be afraid to stop your agent at every turn while going over a policy illustration and asking for clarification.
