What Insurers Should Strive to Eliminate From Illustrations

Insurance illustrations serve as a tool for consumers navigating financial products with a savings or investment component, such as life insurance or annuities. They provide a forward-looking perspective, projecting potential future values and benefits under various conditions. These documents help individuals understand how a policy might perform over time, aiding in informed financial planning.

The Role of Insurance Illustrations

Insurance illustrations function as hypothetical projections, showing how a policy could evolve under specific circumstances. They are estimates based on factors like current interest rates, mortality rates, and policy charges, not guarantees. Insurers provide these illustrations due to regulatory requirements and consumer demand for clarity on long-term performance.

These projections allow potential policyholders to visualize the accumulation of cash value, the future death benefit, and the duration of coverage. Illustrations help consumers assess a policy’s suitability for their financial goals.

Elements That Obscure or Mislead

Overly optimistic or unrealistic projection rates are a common issue. When illustrations employ excessively high growth rates, they can inflate projected values, creating an expectation of returns that may not be achievable. This can lead to disappointment if actual policy performance falls short.

Complex jargon and technical terms also challenge consumers. Industry-specific terminology, such as “cost of insurance” or “net surrender value,” can confuse those without a financial background. When these terms are not clearly defined, they hinder understanding of the policy’s mechanics.

Fees and charges can also be hidden or obscured. Administrative fees, mortality charges, and surrender charges might be buried in fine print or not clearly itemized. This lack of transparent disclosure makes it difficult for consumers to ascertain the true cost and compare products effectively.

Illustrations that blend guaranteed and non-guaranteed elements without clear differentiation risk misleading consumers. Guaranteed values are contractually assured, while non-guaranteed elements depend on future performance and are subject to change. When non-guaranteed components are prominently displayed without distinct separation, consumers may mistakenly perceive them as certain. The National Association of Insurance Commissioners (NAIC) specifically addresses this in its Life Insurance Illustrations Model Regulation, emphasizing clear separation to prevent misrepresentation.

A lack of clear assumptions further complicates interpretation. Consumers may not fully grasp the underlying assumptions used to generate projections, such as current interest rates or premium payment patterns. Without transparent articulation, understanding how changes in these variables impact future performance becomes challenging. Poor design, excessive data, or small print also contribute to confusing layouts.

Principles for Transparent Illustrations

To foster consumer trust and understanding, insurers should adopt principles for transparent illustrations. Employing realistic and conservative projections is paramount, emphasizing prudent growth rates. This approach helps manage consumer expectations and provides a more accurate representation of potential policy performance.

Adopting plain language and providing clear definitions for all technical terms is essential. Illustrations should use simple, unambiguous language accessible to an average consumer. Industry-specific terminology must be accompanied by understandable explanations.

Full disclosure of all costs is another foundational principle. Insurers should clearly itemize all fees, charges, and expenses. This allows consumers to easily understand the financial implications.

The distinct separation of guaranteed and non-guaranteed values is important for clarity. These components should be presented in separate sections, explicitly highlighting which values are guaranteed and which fluctuate. This helps prevent misunderstandings about projected benefits.

A clear statement of all assumptions used in the illustration is necessary. This involves outlining factors like current interest rates and mortality assumptions. Providing this detail, along with an explanation of how projections might be sensitive to changes, empowers informed decisions.

Presenting multiple scenarios, such as pessimistic, moderate, and optimistic projections, can enhance transparency. This helps consumers understand the range of potential outcomes and variability. Prioritizing a user-friendly design with clear layouts improves readability and comprehension.

Citations

1. NAIC. “Life Insurance Illustrations Model Regulation (#582).” Accessed August 25, 2025.