How to read an IUL benefit illustration: two scales, the illustrated rate and 12 checks including lapse age

Definition: what a benefit illustration is, and is not

A benefit illustration (also called a Policy Illustration) is a document in which the insurer, under regulatory and industry guidelines and a set of stated assumptions, shows year by year the death benefit, account value and surrender value of a policy. It answers "what are the numbers under these assumptions", not "what will they actually be". Illustrations by life insurers in Singapore are governed by the Life Insurance Association, Singapore (LIA) Guidelines on Policy Illustrations, Cover Page and Bundled Product Disclosure (MU 22/24, issued 7 Jun 2024, replacing MU 22/18 of 29 Jun 2018). Universal life uses the format in Appendix IV(d) of the guidelines; other non-participating products whose non-guaranteed benefits are determined by a selected index have a separate Appendix IV(e). Which template an IUL follows is for the document the insurer actually provides to say.

When reading, first tell the documents apart. The materials for an IUL generally include:

The two scales: what the guaranteed and illustrated columns assume

The LIA template defines the two scales precisely. The first is calculated at the guaranteed crediting rate and maximum charges and represents the floor scenario for the policy's benefits. The second is calculated at the current crediting rate and current charges; these are the values on the illustration date and are not guaranteed, and the insurer may adjust them at its discretion, but not below the guaranteed minimum, and charges will not exceed the contractual ceiling.

The illustrated column is neither an upper nor a lower limit: the template states that actual crediting rates may be higher or lower than the illustrated values, and that the illustrated yield upon surrender in the current column likewise does not represent a possible upper or lower limit. Currency also affects the rules: for Singapore dollar policies the higher scenario is subject to a cap of A% set by the LIA (clause 2.16 of the 2018 edition reads "For Singapore dollar policies, the higher rate(s) must not exceed A%"; the value and the appendix in which it sits are for the LIA's current guidelines to say, and this site quotes no specific value). For other currencies (Singapore IUL plans are mostly denominated in US dollars), the rate may not exceed the insurer's current crediting rate in that currency and must be reasonable looking forward.

The 12 checks

Group 1: basis and premises

• 1 Product and version. Check the product name, version, currency, premium payment term, premium and basic sum assured. Currency determines the exchange rate exposure and also which cap rule applies to the higher scenario.
• 2 Life assured assumptions. Check age at entry, sex, smoker status and underwriting class (standard or loaded). When comparing two illustrations, these conditions must be identical or the numbers are not comparable.
• 3 Crediting rate and maximum charges in the guaranteed column. Confirm that the guaranteed column uses the guaranteed minimum crediting rate and maximum charges stated in the contract, and find the same figures in the product summary.

Group 2: lapse and the illustrated rate

• 4 Lapse age in the guaranteed column. If the column shows "expected to lapse before age N", note N; what it means is covered in the section "Lapse age" below.
• 5 The illustrated rate and its explanation. The insurer sets the illustrated rate under the guidelines, and its upper limit is regulated; it is neither a historical average nor a forecast. See whether the illustration explains the basis of its assumptions and whether old and new money are subject to different rates.
• 6 Current values and guaranteed minimums of the index parameters. Check the current cap, participation rate, spread and floor of each index account, together with the guaranteed minimum cap and minimum participation rate in the contract. The wider the gap between them, the more the illustrated column relies on parameters staying unchanged; see Caps, participation rates, spreads and floors.

Group 3: charges and death benefit

• 7 The charges table, item by item and by term. List the basis and term of the premium charge, policy charge, cost of insurance, administration charge and surrender charge, and check them against the distribution cost table. Rates are for the product summary and policy contract to say; see IUL cost of insurance and charges.
• 8 Surrender value versus cumulative premiums. Compare surrender value on day one and in each of the first 10 years with cumulative premiums paid, and read the cumulative effect of deductions table. The template warns that early termination usually costs a lot and that surrender value may be zero or below the premiums paid.
• 9 Death benefit formula and net amount at risk. Confirm whether the death benefit is "the higher of basic sum assured and account value" or "basic sum assured plus account value", because it determines the base on which the cost of insurance is calculated.

Group 4: access and sustainability

• 10 Loan and withdrawal assumptions. Does the illustration include additional premiums, withdrawals or loans? The template requires a statement of whether the illustrated yield upon surrender takes these actions into account. For an illustration that includes loans, check the loan interest rate and the order of repayment; see Policy loans and withdrawals.
• 11 Conditions of the no-lapse guarantee. Find the guarantee term and conditions (premium thresholds, whether withdrawals and loans are allowed, whether a change of life assured is permitted); see Will an IUL lapse on its own.
• 12 Free-look period and refund rules. The free-look period is at least 14 days, counted from receipt of the policy documents; the refund is the premiums paid less costs the insurer has incurred, such as medical examination fees (LIA cover page template, MU 22/24).

How to read the illustrated rate and the illustrated yield upon surrender

The Illustrated Yield upon Surrender expresses the amount receivable on surrender relative to the premiums paid as an annualised figure, after deducting the cost of insurance and all charges. The LIA specifies that the calculation age N is the greater of age at entry plus 40 years and age 65, subject to the longest illustration term of the insurer. The cover page also tells readers that they may compare it with the returns on Singapore Savings Bonds and government securities, while noting that the figure is already net of the cost of insurance and charges.

Be aware of the difference in basis when comparing with bonds: an insurance contract includes a death benefit, runs for a longer term and carries a cost on early surrender, so it is not the same kind of product as a bond.

Lapse age: the guaranteed column says "lapse before age N"

The LIA template requires that if a scenario is expected to lapse before age N, the illustration must say so truthfully; the cover page also warns that the policy lapses when the account value cannot cover charges and additional premium may be needed. The guaranteed column uses the minimum crediting rate and maximum charges, the least favourable contract conditions, so a lapse warning there is not surprising, but its meaning needs to be understood.

"Lapse" does not mean it will certainly happen, but it shows that the policy's sustainability rests on the non-guaranteed parts. The mechanics of sustainability are covered on the lapse page.

How it compares with the U.S. "alternate scenario"

The U.S. AG 49-A (which applies to life insurance policies with index crediting sold in the United States) requires illustrations to show an "alternate scenario" side by side, in which the index crediting rate is no higher than the lower of the highest value in the illustrated scenario less 100 basis points and the fixed account crediting rate. It differs from the Singapore guaranteed column: the guaranteed column is the contractual floor, whereas the alternate scenario is still a more conservative non-guaranteed assumption.

For details see Singapore and U.S. rules. An illustration received in Singapore follows the LIA format. Common misreadings (treating the illustrated column as an expectation, comparing only account value and not surrender value, and setting different assumptions side by side) are covered under Common misconceptions. If you would like a benefit illustration interpreted in light of your own circumstances, you can register your needs through the contact details on this site.