Definition
An in-force illustration is a document provided to the contract owner during the life of an annuity contract — periodically or upon request — that presents current values, recent crediting or performance, and projections of future contract behavior under specified assumptions, distinct from the illustration provided at the point of sale.
Why it matters
The in-force illustration is the principal mechanism by which a contract owner can evaluate, after purchase, how the contract is actually performing relative to the expectations established at sale. For products where the issuer retains discretion over crediting parameters or where actual performance depends on factors unobservable at sale, the in-force illustration is often the only periodic visibility into how the structural features of the contract are actually operating.
How it works
In-force illustrations are required at varying frequencies depending on product type and jurisdiction. Variable annuities are subject to annual reporting requirements under FINRA rules and SEC regulations, including periodic statements that function as in-force illustrations. Fixed and fixed-indexed annuities are subject to less consistent in-force illustration requirements; some state adoptions of the NAIC Annuity Disclosure Model Regulation require in-force illustrations on request, and some require periodic reporting. The in-force illustration typically presents the current account value, any guaranteed values, the recent crediting history, the current applicable crediting parameters (cap rates, participation rates, spreads for indexed products), and projections of future values under specified assumptions. The accuracy of any projection depends on whether the issuer's discretionary parameters are held constant or projected forward, an assumption that is usually disclosed within the illustration.
In practice
An individual holding an annuity contract should review the in-force illustration periodically — both to confirm that the contract is performing as expected and to identify any changes in crediting parameters, applicable charges, or contract features. Useful questions to ask the issuer or recommending party include: how often in-force illustrations are provided automatically and how to request one, what crediting parameter changes have occurred since the contract was issued, how the in-force values compare to the sale-date illustration projections, and what the contract would look like if current crediting parameters are held constant going forward.
In the Longevity Standard Framework
The in-force illustration is the regulatory mechanism by which the cost-structure property of a lifetime income arrangement becomes (or fails to become) visible to the contract owner during the contract's operating life. The cost-structure property determines how much of the structural pooling benefit reaches the participant, and the in-force illustration is particularly relevant for products with discretionary or crediting-parameter cost structures because those values are not fixed at issue and the contract owner has no independent visibility into changes. Embedded spread in fixed annuities is generally not surfaced in in-force illustrations because the spread continues to operate as a margin built into asset yield. Crediting parameter drag in indexed annuities becomes more visible over time as in-force illustrations document parameter changes — the cumulative effect of repeated cap rate, participation rate, and spread adjustments is observable in the in-force record in a way it is not at the point of sale. Guarantee charge in variable annuities with living benefits is typically disclosed as a separate line item in the periodic statement. The Longevity Standard framework relies on the disclosure produced by in-force illustration requirements to characterize cost structure over the contract life but does not itself originate disclosure requirements.
Related terms
- Illustration regulation
- Annuity disclosure requirements
- Cost structure
- Crediting parameter drag
- Embedded spread
- NAIC model regulation
- Carrier renewal rate practices