How to read an IUL illustration without getting burned

An illustration is a math exercise under assumptions. The client thinks it's a forecast. Your job is to know which columns are which.

The illustrated rate. The crediting rate the projection assumes every year, forever. Real credits vary year to year between the floor and the cap. Ask what the carrier's own max illustrated rate is and what a lower rate does to the same policy.

Caps, participation rates and spreads. The cap limits the credit in a strong index year. The participation rate scales it. A spread is subtracted. These are set by the carrier and can change on existing policies within the contract's limits. Know the current numbers and the guaranteed minimums.

Floor. Usually zero. Zero means the index credit can't go negative. It does not mean the cash value can't go down, because charges still come out.

Charges. Cost of insurance rises with age. Policy charges, per-thousand loads, premium loads and rider costs run every year. Look at the guaranteed column: that's the policy with charges at their maximum and credits at the floor.

Loans. Fixed versus indexed or participating loans behave very differently in a down year. An illustration that shows income in retirement from policy loans at the illustrated rate is showing the good case.

Funding. A policy funded near the guideline limit and an underfunded one with the same face amount are different products in practice.

Three questions before any client sees one: what's the guaranteed column say, what happens at two points below the illustrated rate, and who pays if it lapses at 78?