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What is an in force illustration and how do I read one?
An in force illustration is a fresh projection of a policy you already own, run with your real cash value, your real loan and the insurer's current dividend or interest rates. To read one, skip the headline number. Find the net cash surrender value, the guaranteed column, and the year any column runs out of money.
The illustration you were sold on was a guess, and an in force illustration checks it.
When you bought the policy, the agent showed you a sales illustration. It projected decades of cash value from that day's dividend scale or crediting rate, with no loans and every premium paid on time. Real life almost never follows that script.
An in force illustration starts over from today. It uses the cash value you actually have, the loan you actually took, the premiums you actually paid, and the rates the insurer is using right now. Then it projects forward again. Most insurers will run one if you ask the company or your agent, and many do it at no charge.
Quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor, not a fiduciary, and not a tax professional. This is general education, not advice on your policy.
Two columns tell two different stories, and only one of them is a promise.
Every illustration has a guaranteed column and a non guaranteed column. The guaranteed column shows what happens if the insurer pays no dividends and charges the most the contract allows. Those guarantees depend on the claims paying ability of the insurer. The non guaranteed column assumes today's dividend or interest rate holds for the rest of your life. Some illustrations add a midpoint column in between.
Salespeople point at the non guaranteed column because it looks better. You should read both. The space between them is how much of your plan rides on the insurer's future decisions.
The number that matters is net cash surrender value, not cash value.
Cash value is the gross figure. Net cash surrender value is what you would actually walk away with after surrender charges and any loan balance come out. If you have a loan, the gap between those two lines can be large.
The same goes for the death benefit. Look for net death benefit, which is what your beneficiaries receive after the loan is repaid out of it. A policy can show a big death benefit on page one and a much smaller net figure once the loan is counted.
The most important row is the year a column hits zero.
Run your finger down the net cash surrender value in each column. If it reaches zero before the last age on the page, the policy is projected to lapse in that year unless something changes. With a loan open, a lapse can also leave a tax bill on the gain, which our page on lapses with a loan covers in full.
Here is an illustrative example. Say you bought a policy twelve years ago and the sales illustration showed it carrying a loan to age 100. You request an in force illustration today. Dividends came in lower than projected and the loan rate went up. Now the non guaranteed column runs dry at age 88 and the guaranteed column at 79. Nobody did anything wrong, and nobody called you about it either. You only find out because you asked.
Ask for a stress test, because the default run is the friendliest one.
A standard in force illustration assumes current rates forever. You can ask for more. Request a run with the dividend scale one point lower than today. Request one where you stop paying premiums and only borrow. Request one showing your loan left open to the end of the policy.
Then read the footnotes. They state the dividend scale used, the loan interest rate assumed, whether dividends are paying part of your premium, and whether the projection assumes you keep paying. Change any one of those and the zero year can move by a decade.
Request one every year or two, and always before a big move.
A policy with no loan and steady premiums can go a couple of years between checks. Get one sooner if you have a loan open, after any dividend cut, before you stop paying premiums, before a large withdrawal, and before you replace the policy with a new one. Keep each one so you can line them up and see the trend. If the zero year keeps moving closer, that is your early warning, years before the insurer's lapse notice.
Before you decide
Questions worth asking.
Can you run an in force illustration on the current dividend scale and another one at one point lower?
In which year does the net cash surrender value hit zero in the guaranteed column, and in the non guaranteed column?
How does this in force illustration compare to the sales illustration I signed, year by year?
What loan interest rate does this projection assume, and is my loan rate fixed or variable?
If I stopped paying premiums today and only borrowed, how long would the policy last?
Why are you recommending I replace this policy, and can I see the in force illustration on my current one before I decide?
Related
How do I get an in force illustration for my life insurance policy?
Call the insurance company's policy service line or ask the agent on the policy. You can request specific scenarios, such as a lower dividend scale or no further premiums. Most insurers will run one on request, often at no charge, though timing and limits vary by company.
What is the difference between a sales illustration and an in force illustration?
A sales illustration is a projection made before you buy, using that day's rates and assuming no loans and every premium paid. An in force illustration is run on a policy you already own, using your actual cash value, loans, premium history and the insurer's current rates.
How often should I get an in force illustration?
Every year or two is a reasonable habit, and sooner if you have a policy loan open. Always request one before you stop paying premiums, take a large withdrawal, or replace the policy. Lining them up over time shows whether the policy is drifting off its original projection.
Are the numbers in an in force illustration guaranteed?
Only the guaranteed column is, and those guarantees depend on the claims paying ability of the insurer. The non guaranteed column assumes today's dividend or interest rates continue for the life of the policy, which is not guaranteed and rarely happens exactly as shown.
Where this fits.
This question sits inside a bigger one. Infinite Banking walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.