When you buy a policy with a savings or investment side, you're usually shown an illustration: a table or chart that shows how the policy might grow over the years. It's the page that often makes the sale.
It's also the page most worth reading carefully, because it contains two different kinds of numbers that look similar.
Guaranteed versus non-guaranteed
Guaranteed values are amounts the insurer is contractually obliged to pay, regardless of how markets or its own results turn out.
Non-guaranteed values, often called projected, illustrated or "at assumed rates," show what could happen if certain assumptions come true: a particular dividend, a particular investment return. They're an estimate under stated conditions, not a promise.
Many illustrations show more than one scenario, for example a lower and a higher assumed rate. The higher one is rarely a guarantee.
How to tell which is which
Look for labels:
- "Guaranteed" or "guaranteed cash value"
- "Non-guaranteed," "projected," "illustrative," "assumed rate of return"
- Footnotes explaining the assumptions
If the page is a wall of numbers with no labels, ask the advisor to mark which are guaranteed.
What to read in the table
1. The early years. In many products, the value in years one to three is low, sometimes lower than what you've paid. That's how the product is built, and it's why stopping early can be costly. 2. The break-even point. The year when the value first equals the premiums paid. 3. The guaranteed column. If it's far below the projected one, ask what has to happen for the projection to be reached. 4. The assumptions. What rate of return is being used? Is it realistic over many years? 5. Charges. Are they shown, and when are they highest?
Questions to ask
- "If the projected numbers don't happen, what do I get?"
- "What is the lowest scenario in this illustration?"
- "What happens to the protection if the fund performs poorly?"
- "What happens if I stop in year three, five or ten?"
An honest note about projections
Projections can be useful. They show how a product behaves and help compare options. The problem arises when they're treated as predictions, and people plan their lives around the highest column.
A fair illustration helps you decide. A persuasive one makes the decision for you.
A simple rule
Plan on the guaranteed numbers. Treat anything above that as a pleasant possibility.
If the product only makes sense in the optimistic scenario, you've learned something important before signing.
Sources: General description of how life insurance and investment-linked illustrations separate guaranteed and non-guaranteed values, as required in insurer disclosure documents. Specific labels and rules differ by insurer and product, so read your own illustration and ask the insurer to confirm.
The free Life Ready Checklist at lifereadywithvenus.com has a page for writing down what you find, free and with no sign-up.
