What is an Inforce Illustration?
An inforce illustration is an estimate of how a life insurance policy’s cash value balance will change over time. The illustration can be incredibly useful in your financial planning, because — unfortunately — life insurance policies can go sideways. This happens when the policy’s earnings don’t cover the ongoing expenses. The cash value balance absorbs that imbalance initially. But once the cash value is consumed, your policy will lapse unless you increase your premiums.
The inforce illustration either confirms your policy is healthy or gives you an advanced warning that your policy may need more funding.
You may remember receiving a similar projection of your policy’s performance when you first purchased the insurance. That initial projection was based on interest rates and insurance costs available at that time. But interest rates ebb and flow, and policy expenses and mortality costs rise. It’s likely that changes in these variables have already caused your policy to perform differently than originally expected. The inforce illustration recasts the policy outlook, starting from its current cash value balance and using current assumptions for the interest rate and insurance costs.
Why you should request an inforce Illustration
You might not think about your life insurance much, but it does affect several areas of your finances. The premiums are a line item in your budget, the cash value balance is a source of liquidity, and your death benefit probably plays a major role in your estate plan. If you’re in danger of rising premiums, depleted cash value, or lapse of your death benefit, you’d want to know as soon as possible. That’s why you’d request an inforce illustration.
Inforce illustrations use assumptions to project how your cash balance will change over time. Your insurer may use a standard set of assumptions, but you can also request specific scenarios. For example, you can have the policy projected based on your current premium, current interest rates, or the policy’s guaranteed rate and cost of insurance.
Current premium illustration
An inforce illustration using the current premium will show how the policy’s cash value will evolve at the current interest rate if you don’t change your payments. You might see the cash value decline at some point. That’s when the policy’s expenses start outpacing the earnings and premium income. The policy can remain active as long as the cash value stays above zero.
Current interest rate illustration
You can also ask your insurer to recast your premiums based on the current interest rate. This illustration will estimate the minimum premium payments needed to keep the policy in force until your chosen end-date — usually your 100th birthday. In this scenario, you will see the cash value decline to $1, which is as low as it can be before the policy is in danger of lapsing.
Your insurance policy has a baseline guaranteed interest rate as well as a cap on the increases to the cost of insurance. Think of these as your policy’s worst-case scenario numbers. An illustration using the lowest possible interest rate and the highest possible costs should show the highest premiums you’d have to pay to keep the policy alive until your chosen end-date.
What happens if you stop paying insurance premiums (increased premiums)
If an inforce illustration shows trouble ahead for your policy, you have two options. You can increase your premiums now or you can do nothing. If you do nothing, your insurer will eventually take the funding shortfall from your cash value balance. That will continue until the cash balance is run down to zero. At that point, the policy enters a grace period, during which you can add funds to keep your coverage alive. At the end of the grace period, the policy lapses and your death benefit is no longer available to your beneficiaries.
How to request an inforce illustration
You can request an inforce illustration by calling your agent or insurance company. To ask for all three illustrations described above, you might say something like, “I’d like you to generate three inforce illustrations. Show me one using the current assumptions, one based on the current assumed interest rate to carry my policy to age 100, and one based on guaranteed assumptions to carry my policy to age 100.”
How often should you request an inforce illustration?
The variables that affect your policy’s health can fluctuate from year to year. To avoid surprises, you’ll want to request an inforce illustration every two to three years.
Understanding your Inforce Illustration
Your inforce illustration probably isn’t going to be user-friendly. Expect an intimidating document with several columns of figures. It may take you some time to orient yourself to what the illustration is telling you.
Every insurer prepares illustrations differently, but these are the common elements:
- Background information. This will be an overview of you and your policy. It should include your name and your policy details, including the face amount, issue date, policy number, and policy type.
- Assumptions. Commonly, the inforce illustration will include two scenarios, one using the current interest rate and one using the lowest guaranteed interest rate. Other assumptions may be included as well, such as maximum mortality costs and expense charges. You should see the assumptions noted at the top of the columns containing the policy values.
- Timeline columns. The columns at the far left of the document should specify the time frame covered by the illustration, in terms of the policy age and your age. Policy year 3, for example, references the third year the policy is in force.
- Premium. Your illustration should show your annual premium and may also show how your cumulative premium increases from year to year.
- Cash value, surrender value, and death benefit values by year and by assumption. These values comprise the bulk of your illustration. If your illustration includes more than one assumption, you’d see multiple sets of policy values for each year covered by the illustration. The mortality costs and other fees charged to your policy are baked into these policy values. Typically, you won’t see those costs broken out separately.
Set aside a good chunk of time to review your inforce illustrations and bring in a trusted advisor if you have one. As a first step, check the page numbers to ensure you have the complete document. Then, read any footnotes to the assumptions. The footnotes will probably define the guaranteed values and may include other clarifications.
When you’re ready to dive into the numbers, look at the cash value column under the current interest rate first. Ideally, you’ll see the cash value growing from year to year. More commonly, you might see the balance peak and then decline. As long as the cash value doesn’t drop to zero, your policy can stay in force — assuming the interest rate doesn’t drop, costs don’t rise, and you pay the premiums as shown in the illustration. If your cash value stays well above zero with these assumptions, you have a larger cushion to protect you against declining policy earnings and/or rising policy costs.
Next, review the scenario using the guaranteed interest rate. You probably will see the cash value balance (along with the surrender value and death benefit) drop to zero here. This scenario shows how long the policy will stay active at your current premiums if you’re earning the lowest possible interest rate. Make a mental note of that timeline. That way, you’ll be prepared if the policy does drop to the guaranteed rate.
Smart alternatives to canceling life insurance coverage
If your inforce illustration doesn’t look promising, you may consider canceling your coverage so you can buy something more suitable. Unfortunately, a policy cancellation — also called a policy surrender — doesn’t maximize the value of your life insurance. Term life policies have no surrender value. Whole life policies should pay you back your cash value balance, but the insurer deducts surrender fees in the process. Those fees can be substantial, especially on a younger policy.
Fortunately, there are other, more profitable ways to cash out your life insurance, such as a 1035 exchange, a life settlement, or a life insurance loan from Harbor Life Brokerage.
1. Perform a tax-free 1035 exchange
Section 1035 of the tax code allows for the exchange of one life insurance policy for another without tax implications. Check with your tax advisor on the requirements. You may also do a 1035 exchange on annuities, long-term care products, and endowments.
2. Sell the policy through a life settlement
If you don’t need the death benefit, you could sell your life insurance in a life settlement. Life settlements generate more cash than a surrender — as much as 60% of the policy’s death benefit. The buyer of your policy will take over the premium payments and all rights to the cash value and death benefit.
To learn more about life settlements, reach out to the Harbor Life Settlements team. We can estimate your policy’s value for free and answer any questions you have about how life settlements work.
3. Whole life insurance loan program with Harbor Life
If you have a whole life insurance policy, you can borrow against your cash value and death benefit through Harbor Life Brokerage. Our unique whole life loan program liquidates up to 95% of your cash value, pays your future premiums, and keeps a death benefit intact for your beneficiaries. The loan is not taxable and does not have to be repaid.
Contact us if you’re interested in exploring a whole life loan. Our team is happy to provide a no-obligation policy review and loan estimate.