• These policy illustrations were created by five different companies as a tool for selling the same 45-year-old man $300,000 worth of life insurance to protect his family financially when he dies.
  • But the only thing that these five illustrations have in common is that none of them disclose enough information.
  • For example, Alexander Hamilton's illustration doesn't make it clear that there is no guaranteed death benefit after 12 years.
    • How absurd can it be? That means that at age 57, this 45-year-old man will quite possibly have to pay a lot more to get new life insurance, if he can get it at all.
  • Frankly, no 45-year-old man can make an informed choice about which policy to buy on the basis of any of these illustrations. 

--  Senator Howard Metzenbaum

1992 - GOV - Consumer Disclosure of Insurance, p2

Commissioner Robert Wilcox (Utah) pointed out that the members of the working group were significantly more knowledgeable than the target audience of the illustration.

He said if it was difficult for these regulators to understand the illustrations, think how difficult it would be for a potential buyer to understand them

1994-2, NAIC Proceedings

Standards for illustrations

As I've mentioned in previous meetings, illustrations for universal variable life insurance policies must be prepared on a standard basis from company to company.

With the probability of relatively few guarantees in a universal variable life policy, it becomes essential that clients understand the differences between hypothetical results, guaranteed results, current results and illustrative dividend results.

Our initial view is that since these products will be registered with the SEC, it may be appropriate to rely on the SEC to develop a federal standard for these products.

We're concerned about the possibility of requirements varying state by state. (p532)

--  Jerome S. Golden <Monarch> - Chairman - Variable Products Advisory Committee

1982-2, NAIC Proceedings

1988-2, NAIC Proc. - "future benefit illustrations"

1994-1 NAIC Proc (p431) - NAIC -  NALU <NAIFA> Statement - Illustrations -18p

  • The educational task is huge, and it's not just with the customers; it's with our agents also.
  • I would say to all of you that if you think that you don't have any customers or any agents who fail to understand what a nonguaranteed illustration really means, you're kidding yourself.

-- Walter Miller <Prudential>

1991 - Illustrations, Society of Actuaries

  • As a final comment, I want to clarify that I am just an agent who entered this business nearly 20 years ago.
  • I had then, and I have today, a great sense of pride and professionalism in what I do for, and not to, my clients.
  • I sincerely believe we have a flawed instrument in today's sales illustrations.
  • It is neither a reason to condemn our industry nor pretend our industry should have been immune to change, especially with the economic realities of the past few years.
  • But we did not communicate the impact of change as well as we should have, especially the impact of change on the numbers we used in our sales illustrations. So our challenge is to learn and to respond.
  • I sincerely believe it's a shared responsibility by all of us - agents, the actuarial profession, company leadership, regulators and even the consumer.

Our biggest mistake would be to delay. I don't believe the consumer will tolerate or forgive us, let alone the regulators, if we do nothing.

--  Robert Nelson, NALU (now NAIFA)   

1993 - Sales Illustrations - We Can't Life With Them, But We Can't Live Without Them!, Society of Actuaries - 28p


  • Guideline G6 - ILLUSTRATIONS
    • “Primary scenario” means a scenario for values or features of a policy that is based on assumptions about factors affecting the values or features that the insurer judges as reasonable. This includes but is not limited to interest rates. (p1)
    • The interest rate(s) in the primary scenario should generally reflect reasonable assumptions as to the long-term performance of the market to which the interest rate is linked. (p4)
    • One of these scenarios, the primary scenario, should be drawn from an identified range of scenarios that the insurer judges as reasonable. (p5)
    • The general basis and the key assumptions for each scenario should be outlined in the illustration. (p5)
    • The process of identifying a range of scenarios should be done at least annually. If the new identified range differs from the previous one, the new basis should be implemented within a reasonable period of time, i.e., 90 days
  • Grading - Tony Higgins (N.C.) asked the working group to consider projections into the future for only a few years of the non-guaranteed elements, and then projections further into the future of standardized assumptions or guarantees. 1993-3, NAIC Proceedings
  • Mr. Nelson <NALU/ NAIFA> stated that, in his opinion, consumers can not differentiate between illustrations that show what is possible and improvements that are probably not possible.
    • 1994-3, NAIC Proceedings

On perhaps the bad side, the potential buyer is now being subjected to sales illustrations from companies that look identical to him.

Some of these have 7% current scale interest rates, some have 13%, some are front loaded, some are back loaded.

He sees all kinds of different promises.

  • How can he assess the credibility of these proposals?
  • What promises are actually being made?
  • How much risk is he taking and how much is he transferring to the insurer?"



So what do I think is needed?

  • Today's disclosure is far too complex.
  • If policyholders can't understand most illustrations even with help, what are they to do?
  • There's information overload.
  • The regulations we have are not being used consistently across
    the country.
  • More numbers are not necessarily the answer, but maybe less are.
  • More words are necessary to explain what's going on.
  • The regulations, if they are changed, should force more disclosure of what the risks are and "what if" illustrations
    should be mandated.
  • We have to make clear to the policyholder that the illustration is
    not a prediction, it does not promise what's going to happen."  --


    1993 - Sales Illustrations - We Can't Life with Them, But We Can't Life Without Them!, Society of Actuaries

ATTACHMENT SIX-A3 Position Paper - Life Insurance Illustrations
By the Life Insurance Disclosure Working Group of the Life Insurance (A) Committee
August 1993 -Draft: 9/7/93

I. Charge to the Working Group
The working group has been charged to evaluate policy illustrations and to consider establishing requirements for the illustrations or ledger information disclosed or made available to consumers of life insurance.

The working group received and reviewed information from the following sources:
A. American Academy of Actuaries Task Force on Life Illustrations;
B. Testimony of witnesses before the Antitrust, Monopolies and Business Rights Subcommittee, Committee of the Judiciary, U.S. Senate, June 23, 1992;
C. National Association of Life Underwriters Sales Illustrations Task Force;
D. Consumer Reports July-September 1993 report on life insurance, especially the sections on sales illustrations, by Trudy Lieberman;
E. "Illustrations, Ethics and You," a seminar by the Society of CLU and ChFC;
F. "Fungible Present Value Analysis" by Brian Fechtel;
G. California proposed legislation on ledger illustrations and the comments received on the proposal;

1993-3, NAIC Proceedings

  • He questioned the appropriateness of taking non-guaranteed elements and making them guaranteed as suggested as a penalty in the white paper.

1993-3, NAIC Proceedings

  • a) Commissioner Robert Wilcox (Utah) said that the working group had drafted a list of standards that they wish to see included in a model law and regulation eventually adopted (Attachment Four-A).
    b) Commissioner Wilcox next asked Ms. VanLeer to show the illustrations she had prepared that used the standards in the technical resource advisors' draft to prepare an actual illustration (Attachment Four-C).

1994-3, NAIC Proceedings

  • (1) Attachment One-K - A preliminary report from the American Academy of Actuaries Task Force on Life Illustrations.
    (2) Attachment One-L - A package of material from the California Department of Insurance dealing with proposed legislation on life insurance illustrations
  1. Questions & Answers Life Illustrations Model Regulation as of Dec. 17, 1996

 1993-4, NAIC Proceedings

Who Produces Illustrations?  Agents? or Actuaries?

  • .....but I'd like to point out one other real problem, and that's that most of these illustrations are not made up in the home office--they're produced on laptops in the field.


Credibility of Illustrations

In the six meetings we have held since our prior report was submitted, the topic that most dominated our conversations did not relate to the yield index system, but rather to the credibility of yield indexes or any other figures derived from illustrations of products with non-guaranteed pricing elements.*

  • Policies of this nature make up the overwhelming majority of those sold today and likely to be sold in the future.
  • (* By "non-guaranteed pricing elements," we mean either the dividends in a traditional participating policy or any elements subject to change at company discretion such as premiums, interest rates, and mortality charges-----in the so called non-traditional policies that have come to the fore recently.
  • After all, the "best" cost comparison and disclosure system is no better in terms of real value to consumers than the quality of the Illustrative information from which it is prepared. But, surveying current developments, it has been reported that some illustrations assume yearly improvements in mortality charges without so stating.
  • It has also been reported that some illustrations assume higher credited interest rates than those currently payable on similar policies, without so stating.
  • There have been other examples on this theme.

Accordingly, our proposed regulatory language includes the following:

  • Any illustration of non-guaranteed costs or benefits shall state if it displays costs or benefits more favorable than those based on the non-guaranteed factors in effect for similar policies in-force at the time the illustration is prepared.
  • However, such a statement need not be made with respect to any non-guaranteed factors that have been publicly announced by the company with a future effective date, provided that the illustration states that effective date.

--   Report of Yield Index Advisory Committee

1987-1, NAIC Proceedings