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Policy Illustrations andthe Illustration Beauty Contest 
 
How Reliable Is This?
Compare what would happen i an investor was considering two dierent mutual unds. The investor might take the averagereturn each und achieved over the last 20-30 years, and project that rate o return (along with the unds’ current and changeablemanagement ees) to suggest an outcome ar into the uture.This kind o “illustration” is specically prohibited by securitiesregulations. However, let the buyer beware – lie insuranceillustrations are exempt rom this type o regulation.
 Meaningul Illustration Use
 Where an illustration can be useul is in demonstrating a policy’sfexibility. There are a number o ways to “tweak” an illustration to highlight a product’s best eatures. For example:
•
What happens i the policyowner suspends premiumpayments?
•
What happens i the policyowner makes withdrawalsrom the cash values?One way to show fexibility is to let the policy’s enhancements take over the out-o-pocket costs to the owner at some timein the uture (premium oset). Another common presentationcreates a “cash fow” scenario, leveraging withdrawals or policy loans to supplement retirement income, und a college education,or other situations that may require additional income. Whileboth may provide an attractive incentive to buy, it is imperative that the client understands that these benets derive romassuming substantial
non-guaranteed 
dividends (on a whole liepolicy) or,
non-guaranteed 
earnings (or other actors) i it is auniversal lie product.
Live for today and prepare for tomorrow 
The Living Balance Sheet
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, a web-based tool that gives individuals and businesses the inormation they needto view current nancial situations and build ecient strategies or the uture.The Living Balance Sheet
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displays the nancial holdings identied by the client based on inormation andvaluations provided directly by the client or by electronic eeds rom the client’s nancial institutions.Valuations provided by electronic eeds refect the most current inormation provided by nancial institutionsas o the date and time noted, but can refect valuations rom an earlier date and time.The Living Balance Sheet
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and logo are registered trademarks o The Guardian Lie Insurance Company o America, New York, NY. Patent pending.
“A likely impossibility is always preferableto an unconvincing possibility.”  – Aristotle
Lie insurance buyers must be, by regulation, presented with one or more company-generated policy illustrations or review as part o  the sales process. By studying thesecolumns o numbers, a client isexpected to interpret how the policy perorms over the long term.Even though most insurancecompanies use current and actualcompany experience, as regulationsstipulate, illustrations representassumptions made in the policy design. These assumptions are basedon current mortality experience,investment returns, and expensesincurred. The illustration suggests to the buyer how the policy’s values
might 
look in the uture througheconomic enhancements that exceedits guaranteed pricing elements.
 
3
 What Do the Experts Say?
The Society o Actuaries prepared an extensive report onillustrations in 1992 concluding that a valid purpose o policy illustrations is to show the client how the policy works. Anincomplete use is to portray numbers based on certain xedassumptions in order to compare one policy to another. Mostproblems arise because o the illusion that the insurancecompany knows what will happen in the uture and that thisknowledge has been used to create the illustration.
VUL Illustrations – A Deeper Dilemma
Illustrating variable universal lie products presents even moreo a challenge or the insurance industry than illustrations onwhole lie policies because o the inherent volatility in theunderlying sub-accounts o VUL.The trick is balancing the cash value (which, in a level-premiumwhole lie policy, is a constantly increasing actor) with the NetAmount at Risk (which would consistently decrease relative to cash value in the whole lie policy). In contrast, variablepolicies will periodically have declining cash values, requiringcommensurate increases in the net amounts at risk.
Net Amount at Risk = Death Beneft – Cash Value
The diagrams below help to clearly visualize this contrast.
 Whole Lie Insurance
This represents the even progression o increasing cash valueand decreasing net amount at risk (NAR) that is typical o wholelie insurance. UL with Secondary Guarantees will also have these increases, protected with a guaranteed low-end return.
445 50 55 60 65 70 75 80 85 90 95 10002
Assumed Rate of ReturnDeath Benefit
Age
Face AmountAccount ValueAssumed Return
$1,000,000$800,000$600,000$400,000$200,000$0
5045 55 60 65 70 75 80 85 90 95 100
Net Amountat RiskCash Value
Age
of 00

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