PERMANENT INSURANCE INFORMATION

Question: I received an illustration from my insurance agent that looks too good to be true. According to the illustration, if I buy a permanent life insurance contract, I can invest it at a terrific rate of return, borrow from the cash value, supplement my pension and still leave a tax-free fortune for my family when I die. What are your thoughts on this approach to selling life insurance?

Answer: Illustrations of permanent cash value life insurance are designed to help you understand the mechanics of the product being illustrated and how it will react to differing features or assumptions, such as interest rates and life expectancy.

People buy insurance for a number of reasons. Generally, permanent cash value life insurance (e.g. participating insurance, universal life) is purchased first and foremost because buyers anticipate they'll need the capital provided by the contract at death and this need will extend for the long term or for the rest of their lives. This should be the principal reason for buying life insurance.

Other important reasons for purchasing this type of insurance may include financial and estate planning needs. This can consist of building a pool of tax-advantaged capital for retirement purposes, providing liquid savings to fund a university education for children, taking advantage of personal or business opportunities, or dealing with unforeseen financial emergencies.

Before making a decision to purchase an insurance policy based on an illustration, it's important you understand the purpose of illustrations, how they work, and what may be considered a reasonable illustration.

Purpose of life insurance illustrations
Illustrations represent an excellent opportunity to help you understand the features and benefits of a life insurance policy. It's important that you understand the rationale behind the assumptions used to create the illustration. Only then can you make an informed decision as to whether those assumptions are reasonable. Keep in mind that an illustration is intended to show how a policy will work. It's not intended to be a prediction, estimate or guarantee of actual future performance.

There is information that must be provided in a life insurance illustration. For example, where non-guaranteed amounts are included, the illustration must display at least two scenarios of illustrated results. The general basis for each scenario and the key assumptions for each must be outlined in the illustration. One goal of various illustration scenarios is to show how future policy values are impacted by changes in the underlying assumptions, such as decreasing interest rates.

Each insurer must give financial security advisors, at least annually, a range of scenarios that it deems suitable. Every illustration must include at least one scenario (the primary illustration) that falls within that range and one scenario that is less favourable (the alternate or reduced illustration). If any scenario is illustrated that falls outside the identified range, that fact must be clearly disclosed on the illustration by identifying it as an alternate illustration. It's important to note that the use of a reduced illustration doesn't provide a worst-case scenario; it simply helps demonstrate the impact of a meaningful reduction in the underlying illustration assumptions.

Illustrations can help you understand how a product works. However, they shouldn't be used to determine how a particular product will perform in the future.

Your financial security advisor is available to help you understand your existing life insurance policy or a policy you may be considering purchasing. For an explanation of the features and benefits and to help you choose the product best suited to your needs today and in the future, talk to your financial security advisor.

For detailed information on the ways individuals can access the accumulated cash values in a life insurance policy, and the risks and benefits of each option, request a copy of London Life's Options for gaining access to policy cash values consumer guide for individual policy owners.

For more information on the purpose of life insurance illustrations, and what are reasonable assumptions for universal life and participating life insurance illustrations, request a copy of London Life's A guide to life insurance illustrations.

This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting or tax expert.