In-Force Policy Illustrations: A Financial Planning Tool

Lange, David R.; Himes, Ken G.; Jones, Steven T.
July 2003
Journal of Financial Planning;Jul2003, Vol. 16 Issue 7, p46
Academic Journal
The article shows how in-force policy illustration can inform policyholders of both the size of needed premium adjustments when interest rates decline and the consequences of failing to make such adjustments. A declining interest-rate environment, such as that of the past 15 to 20 years, can affect consumers of financial services in ways that the average individual might find quite surprising. Most people outside the insurance industry do not realize the importance of the interrelationship of actuarial science and finance in determining needed premiums on cash-value life insurance policies. The remainder of the article presents the usefulness of in-force policy illustrations, provided by the insurer as a financial planning tool. The premium, cost of insurance and policy cash values are calculated by a universal life policy cash-value Excel spreadsheet program. While the computations are complex, the basic idea behind life insurance financing is quite simple. The premium is used to pay the current COI and expenses, with any additional premium dollars placed in a savings account referred to as the policy cash value. Although the mathematics behind the estimation of the premium adjustment is likely beyond the ability of the typical policy-holder, in-force illustrations prepared by the insurer would provide the necessary premium adjustment information. This article demonstrates the use of an in-force policy illustration, provided by the insurer, as a financial planning tool for adjusting premium payments on interest sensitive polices in response to changes in interest rates.


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