Life Insurance Illustration Assumptions…a Trustee’s Dilemma

In the early ‘80s when interest rates skyrocketed (Are you old enough to remember 18% mortgage rates?) the insurance industry created Universal Life insurance (UL), with sales illustrations based on “current assumptions,” which included the fixed rate being credited to the policy’s cash value at the time of the policy’s issue. As with all sales illustrations, the historically high “current” assumptions were projected over the life of the insured, creating a rosy scenario that was easy to sell. The higher the interest rate credited, the lower the premium needed to sustain the policy. Unfortunately, as can be seen by the chart to the right, which shows the actual crediting rate of a top UL carrier, those rates did not hold. The rosy scenario promised turned into a thorny reality as policy cash values plummeted and policies lapsed. In the mid to late ‘90s when a monkey with darts could rack up double-digit returns in the equity markets, many agents were selling Variable Life contracts tied to the equity markets with 12% annual return assumptions. How did that work out? Same outcome: crashing cash values and lapsing policies. Even venerable old Whole Life has seen a steady downturn in dividend rates over the last twenty years, with forecasted “vanishing premium” scenarios that led to vanishing policies and lawsuits. Point being, a sales illustration is just a projection, and your job as a trustee is to determine whether that projection will come true.