NAIC Proposes Bold Changes to Life Insurance Policy Illustrations to Enhance Transparency and Accuracy
The National Association of Insurance Commissioners (NAIC) has unveiled a suite of updates aimed at improving the transparency and accuracy of life insurance policy illustrations. These changes will not only impact insurers but will also provide consumers with clearer expectations regarding policy performance.
Here’s what you need to know about this potentially game-changing move for the life insurance industry.
Why Life Insurance Illustrations Need an Overhaul
Life insurance policy illustrations have long been a source of confusion for consumers. While they’re designed to project how a policy may perform over time, they often include optimistic assumptions about factors like investment returns and expenses. The result? What you see in the illustration isn’t always what you get from the policy.
According to the Actuarial Standards Board (ASB), the increasing complexity of life insurance products, especially those involving index-based interest calculations, calls for stronger, more precise guidelines. The ASB’s own revisions to Actuarial Standard of Practice (ASOP) No. 24 stress the importance of basing these illustrations on “disciplined current scales” grounded in actual experience, not aspirational projections.
The NAIC’s Life and Annuity Illustration Subgroup is now considering updates to its Life Insurance Illustrations Model Regulation (#582), with a sharp focus on indexing products sold after December 2020 under Actuarial Guideline XLIX-A. These updates are essential as the life insurance industry faces growing scrutiny over whether illustrations accurately represent probable outcomes, especially under shifting economic and investment conditions.
The Key Proposals
The proposed revisions are aimed at creating a uniform standard for how policy illustrations are prepared and what they can promise. Here’s what stands out from the latest draft regulations and actuarial updates:
1. Grounding Illustrations in Reality
One of the NAIC’s most significant proposals involves ensuring that all illustrations are based on recent and credible experience data. For investment-related policies, such as indexed universal life (IUL) insurance, this means reflecting the net costs of hedging and realistic capital gains projections rather than optimistic assumptions.
For example, the updated rules specify that investment return factors cannot be based on anticipated trends or wishful improvements in the market. Actuaries are now required to consider historical averages and realistic economic scenarios when setting illustrated rates.
2. Transparency Around Hedging and Costs
Indexed products depend heavily on financial hedging strategies to deliver returns linked to indexes like the S&P 500. Under the NAIC’s and ASOP’s revisions, insurers must disclose how hedging costs impact the illustrated rate of return, ensuring consumers are less likely to view index-linked projections through rose-colored glasses.
3. Revised Testing for Policy Viability
The new rules enhance self-support and lapse-support testing. Self-support ensures that policy illustrations reflect scenarios in which the policy can sustain itself financially under current assumptions without drawing from other products. Meanwhile, lapse-support testing eliminates scenarios where projected results are only favorable because the policy assumes higher-than-realistic lapse rates.
4. Curbing Overreach in Sales Illustrations
Gone are the days of exaggerated performance metrics. For policies sold more than a year ago, insurers must affirm that the current scales used in illustrations are still valid, especially if supportable by updated experience data or economic environments. This ensures older policies still meet today’s tighter transparency standards.
5. Enhanced Role for ‘Illustration Actuaries’
Actuaries now take on even greater accountability. The ASB’s update to ASOP No. 24 formalizes their role in certifying compliance, detailing requirements for documentation and error correction while clarifying how actuaries evaluate experience factors.
Potential Impact on Consumers
For policyholders, these changes promise significantly higher protection against misleading or overly optimistic illustrations. Indexed products, which have been notoriously difficult to evaluate, will have stricter oversight, giving buyers a clearer view of expected returns and risks.
Consider this statistic from the NAIC’s internal research: for every 1% miscalculation in illustrated returns on a $500,000 indexed life policy, policyholders may face a $25,000 difference in projected cash value after 10 years. That’s a stark reminder of why accuracy matters.
With mandates on disclosure, consumers will also gain more transparency into what factors influence their policy performance, making it easier to shop around and compare insurers on equal footing.
Practical Applications for Insurers
Insurance carriers must pivot to comply with these heightened standards, which could mean overhauling their models, hiring additional actuarial staff, or investing in new tools for data analysis. Many insurers will have to create more robust governance frameworks to track the real-world performance of their assumptions over time.
On the bright side, adhering to the revised illustrations standards could build trust with customers, potentially increasing sales in competitive product categories like IUL policies. A shift toward more realistic illustrations may also reduce litigation risk, as overly rosy projections have frequently led to disputes in the past.
Some insurers already ahead of the curve have embraced tools such as Generally Recognized Expense Tables (GRET) to streamline compliance with accurately attributable operating costs.
What Comes Next?
The NAIC’s ongoing deliberations leave room for further refinements before official adoption, expected by late 2025. For insurers, now is the time to begin adapting to these updates, even ahead of formal implementation. This means aligning existing systems with the ASB’s revised Actuarial Standard of Practice No. 24 while keeping an eye on additional updates to the NAIC’s Model Regulation.
For consumers, staying informed is key. If you’re considering a new life insurance policy, ask your agent or financial advisor how these changes could affect the accuracy of illustrations presented to you.
The bottom line? Transparency and accountability in life insurance policy illustrations have been long overdue. With sharper rules, clearer disclosures, and stricter tests for reliability, both policyholders and insurers stand to gain in this new era of trust and accuracy.