Life Insurance Illustration

Nine years after buying a universal life policy that was sold using an illustration, Perrine writes to the insurer asking how the contract is actually performing against what she was shown. Under the NAIC illustrations framework, what is the insurer obligated to provide?

1. A.A refund of premiums if actual performance has trailed the original illustrationUnderperformance of nonguaranteed elements is not a breach and does not trigger a refund remedy.
2. B.An annual report of actual policy values and activity, plus an in force illustration on request projecting forward from current valuesCorrect. The framework requires both an annual report and an in force illustration furnished on request.
3. C.A replacement policy on the original illustrated terms, at the insurer expenseNo such make-whole obligation exists. The framework provides transparency, not a performance guarantee.
4. D.Nothing further, because the original illustration disclosed that nonguaranteed elements could changePost-sale reporting obligations are independent of the disclaimers on the original illustration.

Why: The framework does not end at the point of sale. For a policy sold with an illustration, the insurer must send the owner an ANNUAL REPORT showing actual policy values and activity for the period, and must provide an IN FORCE ILLUSTRATION on the owner request, projecting values forward from the current actual status of the contract using current assumptions. Together these let the owner compare what was projected at sale against what has actually happened and what is now projected, which is the only practical check on an illustration made years earlier. The insurer may not refuse on the ground that the original illustration was clearly labelled as nonguaranteed.

Before a new universal life form may be marketed with an illustration, the actuary at Ravensmoor Assurance must certify it against two tests under the model illustration standards. One product design fails because its illustrated non-guaranteed values can only be delivered if a significant number of policyowners surrender or lapse their contracts, so that the survivors are subsidized by those who leave. What is that failing design called, and what is the consequence?

1. A.It is a non-guaranteed design, and it may be illustrated provided the illustration shows the guaranteed column alongside.Wrong. Every illustrated policy must show guaranteed values. That universal requirement has nothing to do with the lapse-support test.
2. B.It is an experience-rated design, and it may be illustrated once the insurer files its actual lapse experience with the department.Wrong. Experience rating is a group insurance pricing concept, and no filing of lapse experience rehabilitates a lapse-supported form.
3. C.It is a substandard design, and it may be illustrated only to applicants who have been rated.Wrong. Substandard refers to the risk classification of an applicant, not to the economics of a policy form.
4. D.It is a lapse-supported design, and the form may not be illustrated at all.Correct. Certification requires that a form be self-supporting and not lapse-supported; failing that test disqualifies the form from being illustrated.

Why: The model life insurance illustration standards require an illustration actuary to certify that a policy form to be illustrated is both SELF-SUPPORTING and NOT LAPSE-SUPPORTED, tested under the disciplined current scale. A design is LAPSE-SUPPORTED when the illustrated values depend on a material number of policyowners terminating their contracts, so that persisting owners are funded by the forfeitures of those who leave. Regulators treat this as inherently misleading, because every prospect is shown values that all of them cannot simultaneously receive. The consequence is straightforward: a lapse-supported form may not be illustrated at all. The insurer may still sell the product, but it cannot support the sale with an illustration of non-guaranteed values.

Under the NAIC life insurance illustrations framework, an insurer wants to show a prospect a whole life illustration whose nonguaranteed dividend column reflects an experience assumption MORE favorable than the dividend scale the company is currently paying, on the ground that management expects improvement. What does the framework require?

1. A.It is permitted only for policies sold to accredited or sophisticated purchasersThe illustrations framework draws no such purchaser distinction in life insurance sales.
2. B.It is permitted as long as the illustration carries a prominent disclaimer that the figures are not guaranteedA disclaimer does not authorize an illustrated scale exceeding the currently payable scale.
3. C.The illustration may not show nonguaranteed elements more favorable than the currently payable scale, which the illustration actuary must annually certify is supportable by actual experienceCorrect. The disciplined current scale caps illustrated nonguaranteed elements, backed by an annual actuarial certification.
4. D.It is permitted if the prospect signs an acknowledgment that he understands the assumption is optimisticA consumer cannot consent around the standard. The limit constrains the insurer, not the consumer expectations.

Why: The illustrations framework rests on the DISCIPLINED CURRENT SCALE. Nonguaranteed elements shown in an illustration may not be more favorable than the insurer currently payable scale, and the scale used must be supportable by the company recent actual experience. The insurer designated ILLUSTRATION ACTUARY must annually certify that the illustrated scale meets these standards and must notify the board and the commissioner if it does not. Management optimism about future improvement is exactly the input the standard excludes, because it is unverifiable and was historically the source of the most damaging sales abuses. Every illustration must also clearly label which columns are guaranteed and which are not.