Are life insurance illustrations forecasts?

How it works

declared annually, never guaranteed

How a policy dividend is decided

1. 01A distribution from the insurer's participating account
2. 02Declared annually at the discretion of the board
3. 03Based on investment results, claims experience and expenses
4. 04It is not interest and it is not a return
5. 05It is never guaranteed, in any year of the contract

The software is given an age, a health class, a premium, a design and one scale of participations. It applies the contract's own rules year by year and prints the result. Every row past the first exists because the machine was told to hold those conditions still.

The cost or the catch

The trouble is that a long table of rising figures reads like a plan even to somebody told it is not one. Two habits fix most of that. Ask for the same design at a lower scale, and read the year the payments are shown ending, since on many designs that year moves.

What the software actually calculates, row by row

underwriting is the part nobody controls

How long each stage takes

1. 01The discovery meetingThirty minutes. Online, with no products.
2. 02The suitability recordOne sitting. A licence requires it before advice.
3. 03The design meetingOne hour. More than one route, guarantees shown apart.
4. 04Underwriting2 to 6 weeks. Decided by the insurer, sometimes longer.
5. 05First conversation to a contract in force6 to 10 weeks. When nothing waits on a medical.

Behind the printed page, the illustration software is running two separate calculations side by side. The first produces the guaranteed column, using only the rates and charges written into the contract itself, the figures the insurer owes whatever the future brings. The second produces the non guaranteed column, adding the dividend scale above the guaranteed base, and it is this second column that grows the fastest and draws the eye down the page. Both columns are recalculated every single year using the same frozen inputs supplied at the start, which is why the software needs no information about what markets will do, what claims experience the insurer will see, or what its expenses will run, since none of those enter the arithmetic as anything other than a single number chosen for the run and then left untouched for sixty rows.

The software also has no memory of the household requesting it. It does not know whether this family has ever kept a savings habit for more than a year, whether the stated premium fits comfortably inside a budget, or whether the design chosen actually serves the reason the coverage was bought in the first place. Those judgments sit outside the calculation entirely, on the side of the person reading the printed pages rather than the side of the machine producing them.

What varies from one illustration to another

no legal limit, a practical one

How many contracts you may own

1. 01There is no legal limit on the number in Canada
2. 02Financial underwriting sets the practical limit
3. 03Total coverage in force is assessed against income
4. 04Insurers share this information with one another

The scale itself is only one input among several that differ from one insurer to the next and from one year to the next at the same insurer. The mortality and expense assumptions built into the guaranteed column differ by product and by the series in which a contract was issued, so a contract sold under a given name in one decade can carry a materially different guaranteed column from a contract sold under the same name a decade later. The design chosen at the point of sale, meaning the mix between base coverage and any additional paid up coverage layered above it, changes how quickly the non guaranteed column climbs and how much of the total value sits in a form that can later be drawn against. And because the scale itself is reviewed by the insurer's board on its own schedule, an illustration printed this year reflects only the scale in force this year, never the scale that produced last year's illustration for the same household and never a scale anyone can commit to for the sixty years the table runs.

A reader comparing two illustrations from two different insurers is therefore comparing more than a rate; the reader is comparing two different sets of assumptions built by two different actuarial departments, applied to two contracts that may not share a single guaranteed feature in common. Even the age of the contract series matters here: a design retired from sale and replaced by a newer one often carried different guarantees than its successor, so a household holding an older contract cannot assume that a friend's illustration on a current product describes the same arithmetic underneath.

What to ask, and of whom

Two requests, made directly to the insurer or through the licensed representative preparing the illustration, do more to correct the false impression of a forecast than any amount of reading the fine print alone. The first is a version of the same design run at a scale reduced from the current one, since the printed comparison between the two runs shows plainly how much of the total in later years depends on a scale holding steady rather than on anything the contract actually guarantees. The second is the guaranteed column shown on its own, separated from the non guaranteed figures entirely, since a household that has only ever seen the combined total has never actually seen what the insurer is contractually obliged to deliver if the scale is cut to zero for the rest of the contract's life.

A third, less often asked, is a written note from the insurer or the representative stating the date the current scale was last changed and in which direction, since a scale that has moved only once in a long period reads very differently from one that has moved several times, even though neither fact appears anywhere on the illustration itself. A fourth is simply the date printed on the illustration compared to today's date, since an illustration prepared even a year earlier already reflects a scale the insurer may since have revised, and a household relying on a document that predates the current scale is relying on a table the insurer itself would no longer print the same way.

Who this matters to most, and who it matters to least

a leveraged strategy, described as one

What an insured retirement plan depends on

1. A participating contract funded heavily from the start
2. The contract assigned to a lender as collateral
3. A line of credit drawn during retirement
4. The death benefit repays the lender at the end
5. Everything depends on the lender continuing to lend

The distance between an illustration and a forecast matters most to a household using the non guaranteed column to plan a specific future event, such as the year a policy loan might fund a known expense or the year premiums are projected to stop being paid out of pocket, since both of those dates move whenever the scale moves and neither date is a promise the insurer has made. It matters far less to a household that bought coverage purely to protect against an early death and has no plan to draw on accumulated value at all, since for that household the guaranteed death benefit is the only figure that was ever going to matter, and that figure does not depend on the scale in the way the accumulation figures do.

What this page will not tell you

This page explains what an illustration is built from and why its later years should not be read as a promise. It does not tell a specific household whether a specific illustration, at a specific premium, fits that household's own circumstances, since that judgment depends on income, other obligations and goals the software was never given and could not have used even if it had been. That judgment belongs to the household itself, working with the licensed representative who prepared the illustration and who can rerun it at different assumptions on request, and where a household wants a reading independent of the person who sold the contract, should I get a second opinion on a policy I already own describes how that independent review works.