California life policy disclosures: illustrations, buyer's guide, and cost indexes

Three disclosure tools

A buyer's guide provides general education about needs, affordability, policy types, and shopping. A policy summary describes the particular policy's benefits, premiums, and values. An illustration projects how that policy could perform under stated assumptions. Separate guaranteed values from nonguaranteed projections: projected dividends or other nonguaranteed results are not contractual promises. Less favorable results may mean additional premium needs or lower values.

California Insurance Code section 10509.950 seeks understandable, nonmisleading illustrations, with clear formats, standards, disclosures, and definitions suited to the audience.

Comparing cost over time

Adding premiums across years without adjustment ignores the time value of money. Under California Insurance Code section 10509.971(a), for sales subject to the chapter, such a cost presentation triggers simultaneous presentation of both the Life Insurance Surrender Cost Index and the Life Insurance Net Payment Cost Index, calculated for 10 and 20 years.

The surrender cost index credits ending cash surrender value and helps compare costs if the owner surrenders at that point. The net payment cost index does not credit that ending value and helps compare the cost of maintaining protection without surrendering for cash then.

Section 10509.971(b) permits other methods recognizing the time value of money, including indexes computed at an interest rate other than 5 percent. Under subsection (c), an index need not extend beyond the premium payment period. The indexes must be accompanied by an explanation that they measure relative costs of similar plans and that a lower index indicates lower cost. Compare like indexes for like periods on a consistent basis. A lower index alone does not establish suitability; consider benefits, guarantees, affordability, and holding period too.