How to Read a Premium Illustration: Guaranteed Versus Projected

A policy illustration is the document that persuades most people to sign, and it is the document fewest people can actually read. It is a table of numbers running out twenty or thirty years, and buried in it is a distinction that changes everything.

Some of those numbers are guaranteed. Most of them are not.

The two columns

Guaranteed values are contractual. They are what the insurer must provide if it meets its obligations, whatever happens to investment markets. They are calculated on the minimum rates written into the policy.

Projected (or illustrative) values are calculated on an assumed rate of return. They are not promises. They are what the numbers would look like if a particular assumption held for thirty years. That assumption may be reasonable. It is still an assumption.

The gap between the two columns is frequently enormous — the projected figure at year 25 can be double or triple the guaranteed one. And the projected column is invariably the one people remember, because it is the larger number and because it is usually the one being discussed out loud.

Here is the discipline: make your decision on the guaranteed column. Treat the projected column as upside. If the policy only makes sense on the projected numbers, you are buying an assumption, and you should at least know that is what you are doing.

Reading it line by line

The header

Check your age, the sum assured, the term, the premium and the payment frequency. Illustrations are frequently prepared on a slightly different basis from the one being discussed — a different age next birthday, a different term, an annual rather than monthly premium. Check before you read further, because everything below depends on it.

The assumed rate

Find it. It is usually in a footnote. Ask what the guaranteed minimum is, and ask to see the illustration re-run at the guaranteed rate. A reluctance to produce that version is significant information.

Death benefit column

For a term policy this is flat and simple. For a permanent policy, check the early years specifically — some products grade the death benefit upward over the first two or three years rather than paying the full sum assured from day one. That is a legitimate design, but you need to know it.

Cash and surrender value columns

Two different things. Cash value is what has accumulated. Surrender value is what you actually receive if you cash in, after any surrender charge.

Look at years 1 to 5. On most permanent and investment-linked policies the surrender value in the early years is well below total premiums paid, sometimes dramatically so, because acquisition costs are front-loaded. This is the single most common source of complaint in the industry, and it is entirely visible in the illustration before you sign.

Also check when the cash value becomes accessible. On some products there is a defined waiting period before you can touch it at all.

The break-even year

Find the first year in which the surrender value exceeds total premiums paid. That is your break-even point, and it is the honest answer to "what if I change my mind?" If break-even is year 15 and you are not confident you will hold the policy for 15 years, this is the wrong product for you.

Charges

Ask for total charges as an annual percentage, including any policy fee, fund management charge and administration charge. Over thirty years, a difference of one percentage point in charges compounds into a very large difference in outcome — comparable in size to a difference in investment return.

Annuity and pension illustrations

These have their own features to check:

• The guaranteed minimum growth rate, which may differ by fund. Find it and note that it is often modest by design — it is a floor, not a target.
• The projected fund at maturity, and the assumed rate behind it.
• The projected pension, and critically, the annuity rate assumed to convert the fund into income. Annuity rates move with interest rates and life expectancy; a projection made today uses today's assumption, and the actual conversion happens decades later at whatever rate then applies.
• Whether the illustrated income is single or joint life, level or escalating. Ask for all four combinations if a spouse is involved.
• What happens if you stop contributing — paid-up values and any penalty.

Take it away before you sign

An illustration is a document, not a moment. Take it home. Read it when nobody is waiting for a decision. Compare it against a second one on the same basis.

Any adviser who is uncomfortable with you taking an illustration away to consider is telling you something about the product. Any adviser who offers to walk you through it line by line, guaranteed column first, is telling you something else.

Noble Accounting & Insurance is an appointed adviser for Guardian Group (Guardian Life of The Caribbean Limited and Guardian General Insurance Limited). Where an article recommends an insurance or annuity solution, that recommendation will be a Guardian Group product, and we are remunerated by Guardian Group when business is placed. Product features described here are drawn from Guardian Group's published material; full terms, benefits, exclusions and premiums are set out in the policy documents and your personal illustration.

General information only. This article sets out general information about accounting, taxation and insurance matters in Trinidad and Tobago as understood at the date of publication. Rates, thresholds, product features, forms and filing procedures change, and the right course depends on your particular circumstances. It is not accounting, tax, legal or financial advice and should not be relied on as a substitute for professional consultation. Please confirm current requirements with the Inland Revenue Division, the National Insurance Board, the Central Bank of Trinidad and Tobago or your insurer as applicable — or speak with us before acting.