How to Accurately Illustrate Policy Loans or Withdrawals

  • Originally published May 18, 2012 , last updated May 24, 2016

Oftentimes you may find your clients interested in loans or withdrawals from their life insurance polices. Common scenarios for loans or withdrawals may include supplemental retirement funds or taking loans for short-term needs, such as planning for a child's educational costs. Here we'll look at how these illustrations work so you can offer:

  • Illustrations that more accurately fit the client's needs
  • Better performance based on age and timing of income
  • More accurate comparisons, whether they are between different products or companies

Before completing an illustration, you must consider a number of variables:

  1. Is the policy nearest age or actual age?
  2. Are the incomes illustrated assuming the beginning of the year, end of year, or disbursed throughout the year?
  3. Does the illustration show age at beginning or end of the year?

The following tips will help you cover all these variables and ensure accurate illustrations.

1. Run the illustrations to match the year of income stream, not the age.

For example, if a client has an expected financial need in three years, when should you illustrate a loan or withdrawal? If the client has the need three years from now, the illustration would be for policy year four if the software shows income at the beginning of the year.

2. Be careful about when distributions are set to occur.

Some companies illustrate income at the beginning of the year, while other companies illustrate at the end of the year. Some even have the ability to spread income throughout the year on monthly distributions.

Later distributions appear to perform better compared to early (beginning of the year) distributions. It is difficult to get a perfect comparison in this situation, but there are ways to minimize the difference. Rather than being 364 days off by illustrating the same year, show the end-year distribution in one year (for example, year 14), and the beginning-of-year distribution in the next year (year 15). Using this method, you are only one day off, opposed to nearly a full year.

3. Consider when income is illustrated. Match the timing to the need; this may appear to be slightly different than the policy year.

Awareness of the client's age on the illustration is pertinent. Many illustrations show the age of the client at the end of the year. However, the software may take the income at the beginning of the year. Be aware of this discrepancy so you are able to address it if the client has any questions. A client may ask why the income stream looks like it is starting at their age 66, even thought they specifically asked it to begin at age 65. If you explain that the income starts at the beginning of the year, while the illustration shows the age at the end of the year, you can confirm the illustration is accurate.

Matching the timing to the need can also make a difference in the projected performance of an illustration. Rather than running an illustration that appears to show income at age 65 (when in fact it may be coming out at age 64 due to these variables), show the income one year later. Having income come out one year later at the correct time will likely result in improved illustrated performance, such as higher income stream or lower premium.

4. Match income to the point in time needed, not necessarily how it appears on the illustration.

In the example below, the client recently turned 45, and the nearest and actual ages are the same. Income is assumed to be on the first day of the policy year. The illustration will show a loan amount in year four. In reality, the client's age when the first loan is taken will be 48.

Because the loan will be taken 3 years and 1 day from policy issue, the loan will first appear in year four.

Keep the above tips in mind and you'll be running accurate and effective illustrations.