Defining the legal status of a life insurance illustration


The prevalent belief is that a life insurance illustration is not a legal document. Life illustration is therefore perceived to be an advertisement to show the performance of a life policy.




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As a result, if an insurer fails to provide the illustrated result, this would be considered to be a misrepresentation instead of a breach of contract. For example on the web site for certified public accountants it is stated: “A life insurance policy illustration is not a legal document–legal obligations are contained in the policy itself.”


CHLIA defines the purpose of illustrations as


“This Guideline reflects the principles of CLHIA’s Consumer Code of Ethics including: “To ensure that Illustrations of prices, values and benefits are clear and fair, and contain appropriate disclosure of amounts which are not guaranteed.” And “To advertise products and services clearly and straightforwardly, and to avoid practices which might mislead or deceive.”


This belief is not substantiated by any facts or court decisions. In fact I am challenging this belief. I will use my own Innovision insurance contract issued by Manulife to answer this question


Is an illustration a contract?


This question is easily answered. An illustration is not a contract. In fact, on my Innovision illustration it is stated clearly: ‘Illustrations are not contracts and are not guaranteed”. This statement is included with all of the illustrations provided by insurers and therefore we can state that this applies for the whole insurance industry. Illustrations are not a form of contracts. While this question is easy to answer, the same does not apply to the question of whether an illustration is part of the life insurance contract.


Is an illustration is part of an insurance contract?


CHLIA defines an illustration as:


“A document you may get from your advisor when you are thinking about buying insurance. It explains how the policy would work. It shows the costs and values of the policy under different conditions. It should also clearly show what’s guaranteed and what’s not. A policy illustration is for your information only and isn’t part of a legal contract.”


THIS IS ABSOLUTELY WRONG!!! Let’s use my Innovision policy contract as a point of reference. In my contract, the summary illustration page that was signed by me was included in the contract. While this page states the illustration is not a contract, it does not state that it is not part of the contract.


To determine whether the illustration is part of the contract, we have to look at what was stated in the policy. In the application, it is stated that upon issuing the policy:


“When you take delivery of the policy contract, you agree to its terms, including any changes we have made to the terms. Your contract includes this application and any attached documents including medical reports.”


Since the summary illustration page is attached in the contract itself, it is therefore evident that the illustration is part of the contract.


Is there anything in the contract that would state otherwise? In my policy there is a specific provision defining the contract. In this provision it is stated that a contract consists of:


a) this policy document
e) all rider pages
i) an endorsements

Since the summary illustration was included in the policy, it would therefore be considered to form of the document and therefore part of the contract. The summary page could also be considered a rider or endorsement. Finally since the summary page refers to the illustration and while the whole illustration is not included in the contract, the summary is inseparable from the full illustration and cannot be understood clearly without referring to the full illustration. As a result, the full illustration would be considered part of the contract. This is my opinion.


My conclusion about whether an illustration is part of a life contract will vary between insurers. It will depend on 1) has the illustration or part of the illustration been included in the contract and 2) what is stated in the policy provisions and application.


Why is this so important?


This is important because if there is a problem with the illustration it will defines the legal remedies available to the policy owner. If the illustration forms part of the contract, the policy owner can sue under breach of contract which is a lot easier than to sue for false advertising or misrepresentation if the illustration is not part of the contract.


An example…


You have bought an Innovision with the Investment Accelerator bonus. For anyone having this type of policy and product from Manulife, the illustration values are overstated. This is easy to explain. The investment accelerator bonus purpose is defined by Manulife on the summary page that is contractual as:


“the Investment Acceleration bonus option offers lower guaranteed management fees resulting in a higher credited rate of interest on your policy”


The problem is that the management fees do not appear on the illustration. The illustration is therefore based on a rate of return where these management fees have already been deducted. However while the management fees don’t appear on the illustration, the investor accelerator bonus has been illustrated. This means that the Accelerator bonus has been credited two times on the illustration. This bonus is a credit of the management fees. Basically Manulife is showing the credit which is the bonus but is not showing the debit which are the management fees. Anyone knows that in accounting this would not balance.


When this is linked to an actuarial meeting held by Steve Krupitz of Manulife at a conference of the Canadian Institute of Actuaries where this was discuss under the “Smoke and mirrors strategy”; a strategy being labeled by these actuaries as a way to inflate the cash values of illustrations to deceive consumers to buy a life policy, this is of great concern.


However if the illustration is part of the contract, this “Smoke and mirror” deception can be addressed as a breach of contract which would be a lot easier to address than under a misrepresentation.


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