Make sure you know what you’re buying
It goes without saying that you need to understand what you are buying. You review car brochures for details that are relevant or important to you. Likewise, you examine a simplified prospectus before investing in mutual funds. But what about a purchase of life insurance, especially a complicated universal life policy? What do you really need to know? How will you get the information you need? The answer is an “illustration”. Simply speaking, it is a document prepared by a life insurance provider that is designed to answer your questions about details such as the cost, the value, and the terms and conditions of the policy you are contemplating buying. These documents can be daunting, however. They can be lengthy (up to 10 pages or more) and filled with tables of data and confusing terminology. An illustration is not a legal document, nor is it legally binding. It is just what it is called – an illustration.
While we can’t tell you exactly what data to look for, we can give you a good overview of the issues that should be addressed in any illustration that you review. At the very least, by the time you have finished reading it, you should know the following:
* Whats the cost of the premiums you will be paying? Are they payable monthly or annually? How about a lump sum payment (if you can afford it)?
* What is the projected cash value for the policy, and what assumptions are made about inflation and rates of return? As well, what mortality rates are assumed? Are these assumptions realistic? They should be.
* What are the policy’s projected dividends, and when are they paid?
* What is the amount of the death benefit?
* If there is flexibility in the premiums you will pay, what are the maximum and minimum amounts you would likely face?
* Are there any administration and/or management charges, and if so what are they?
* What are the policy’s renewal and convertibility options?
You don’t need to be an actuary to read one of these document (although it would make it a lot easier!). But be informed. Don’t be afraid to ask questions, and maintain a healthy skepticism, especially where rate of return and mortality assumptions are concerned. While most insurance agents and brokers are entirely reputable, no doubt there are some that might hope to benefit from the inevitable confusion that arises from such a complex document. Be aware, and you’ll be that much closer to getting what is best suited to your needs.