Understand the Assumptions behind Insurance Projections

If you’re shopping for whole life insurance, an agent likely will show you an “illustration,” a computerized printout that might for example show 11 years of $10,000 payments, a buildup of cash value, and a death benefit around $500,000.

Remember, though, that an illustration is merely guesswork. There is no way the insurer can know how much it will earn, year after year; there is no way it can know things such as company expenses and mortality rates (how many policyholders will die and thus have claims submitted each year).

Some insurers are more aggressive than others in their projections. Their illustrations will show higher cash values or they’ll show lower premium payments for a given level of insurance.

If you buy a policy based on flawed projections, you might wind up paying more in premiums than you expect, and/or for a longer period. To avoid this pitfall, ask about the assumed rate for investment earnings. If it seems unreasonable, ask to have the illustration re-run at a lower, more realistic rate.