How Future Bonus Illustrations Differ From Declarations

Why an Illustration Is Not a Declaration

A participating policy illustration may show how a benefit could develop if specified future bonus rates continued. That is useful for understanding possible outcomes, but it does not turn those assumed rates into contractual additions. The essential distinction is between what has already been declared under the policy and what is being assumed solely to project a future outcome.

This distinction matters whenever a projected maturity or claim benefit includes both accumulated additions and future bonuses. An addition that has already been declared is treated according to the policy terms; if those terms make it guaranteed once declared, it belongs in the guaranteed benefit. A future rate in an illustration is an assumption, not a declaration. Unless and until it is declared in accordance with the contract, it does not create a vested addition.

Definition: A declared addition is a bonus formally added to a policy under its terms. Its guarantee and treatment on death, maturity, surrender, or another event depend on those terms. A future illustrative bonus rate is an assumption used to show a possible future development of benefits. It is not itself a declaration, a vested addition, or a guarantee that the assumed rate will be declared.

An illustration therefore describes a conditional outcome: if the policy remains in force, if the specified future rates are declared and apply as assumed, and if the stated benefit event occurs, the projected benefit would be a particular amount. It does not say that the assumptions will occur. An insurer may show more than one scenario to make this dependence visible.

For a clean projection, state the benefit basis, the bonus basis, the projection period, and the conditions being held fixed. In the examples below, policies are hypothetical, remain in force to maturity, and have no claims, lapses, surrenders, terminal bonuses, or other additions. The illustrations are mechanical calculations under stated assumptions, not predictions or promises.

Set Out the Benefit Basis Before Projecting

A projection should begin by separating the benefit already in place from additions that are only assumed for future years. Let $S$ be the sum assured and $G$ the total of declared additions that are included in the maturity benefit under the stated policy terms. The starting benefit base is then $S+G$, if that is how the contract defines the benefit.

The method for projecting future additions depends on the definition of the bonus scale. For a simple reversionary scale expressed as a rate of the original sum assured, each future addition is calculated from $S$. For a compound scale expressed as a rate of the benefit base at the start of each year, each year's addition depends on the benefit already projected. These are different assumptions and must not be interchanged.

Projection rule: Keep declared additions and assumed future additions in separate parts of the calculation. Apply each future rate to the base specified by its scale, and label the resulting future additions as illustrative unless they are later declared under the policy terms.

Simple Reversionary Bonus Illustrations

Suppose future annual rates $b_j$ are defined as a proportion of the original sum assured $S$, with each annual addition increasing the maturity benefit by $b_jS$. If the declared additions already included are $G$, then the projected benefit after $n$ future declarations is

B_n=S+G+S\sum_{j=1}^{n} b_j.

This formula follows directly from the scale definition. In year $j$, the assumed addition is $b_jS$, not a percentage of the accumulated benefit. Adding the $n$ assumed additions to the existing benefit gives $S+G+\sum_{j=1}^{n}b_jS$, which is the displayed expression. The formula does not apply to a scale defined as a percentage of the accumulated benefit base.

Worked Example: Comparing Two Future Simple Bonus Assumptions

A hypothetical participating endowment has a sum assured of $100,000 and $12,000 of declared additions included in its maturity benefit. Four future annual declarations remain before maturity. One illustration assumes a simple annual bonus rate of 2.00% of the original sum assured; an alternative assumes 1.25% each year. Assume no other benefits or additions and that the policy remains in force to maturity. Calculate both illustrated maturity benefits and their difference.

Method. Apply each future rate to the original sum assured for each of the four years, then add the future amounts to the sum assured and declared additions. The rates are illustrative, not declared.

Under the 2.00% assumption, the future addition per year is

0.0200(100{,}000)=\$2{,}000.

Across four years, the projected future additions total $4(\$2{,}000)=\$8{,}000$. The illustrated maturity benefit is

\$100{,}000+\$12{,}000+\$8{,}000=\$120{,}000.

Under the 1.25% assumption, the future addition per year is $0.0125(\$100{,}000)=\$1{,}250$. Across four years, the projected additions total $4(\$1{,}250)=\$5{,}000$, giving

\$100{,}000+\$12{,}000+\$5{,}000=\$117{,}000.

The difference between the illustrations is $\$120{,}000-\$117{,}000=\$3{,}000$. The $12,000 of declared additions is the same in both scenarios; the difference comes entirely from the future rate assumption. Common mistake avoided: treating the 2.00% illustration as if four future additions had already been declared. They have not; $120,000 is the outcome conditional on that illustrative scale being applied.

Changing Future Rates by Duration

An illustration need not use one constant rate. A scale may vary by policy year or duration. For a simple scale defined per $1,000 of sum assured, first convert the sum assured into the number of $1,000 units, then multiply each year's rate by that number. Add only the projected amounts to the existing benefit; do not replace the already declared additions with the future schedule.

Worked Example: Projecting a Duration-Based Scale

A hypothetical policy has a $125,000 sum assured and $8,500 of declared additions included in its maturity benefit. Four future annual simple bonus rates are illustrated at 16, 18, 20, and 22 dollars per $1,000 of sum assured, respectively. Assume maturity at the end of the fourth year, no other additions, and no claims or lapses. Calculate the illustrated maturity benefit. Then compare it with a separate illustration using a constant rate of $18 per $1,000 for all four years.

Method. Convert the sum assured to units of $1,000. Apply each duration-specific rate to those units and sum the four future additions.

The policy has $\$125{,}000/\$1{,}000=125$ units. Under the duration-based scale, the annual additions are:

Year 1: $125(16)=\$2{,}000$.
Year 2: $125(18)=\$2{,}250$.
Year 3: $125(20)=\$2{,}500$.
Year 4: $125(22)=\$2{,}750$.

The future additions total $\$2{,}000+\$2{,}250+\$2{,}500+\$2{,}750=\$9{,}500$. The illustrated maturity benefit is therefore

\$125{,}000+\$8{,}500+\$9{,}500=\$143{,}000.

For the constant-rate illustration, each year adds $125(18)=\$2{,}250$. Four years add $4(\$2{,}250)=\$9{,}000$, so the illustrated benefit is $\$125{,}000+\$8{,}500+\$9{,}000=\$142{,}500$. The duration-based scenario is higher by $\$143{,}000-\$142{,}500=\$500$. Common mistake avoided: applying the quoted dollars-per-$1,000 rate to $125,000 as though it were 125,000 units. The correct unit count is 125.

Compound Bonus Illustrations

A compound scale uses a different base. Suppose the future rate $r_j$ in year $j$ is applied to the projected benefit at the start of that year, $B_{j-1}$. The annual projection is then

B_j=B_{j-1}(1+r_j),\qquad B_0=S+G.

To justify the recurrence, the year's assumed addition is $r_jB_{j-1}$. Adding it to the starting benefit gives $B_{j-1}+r_jB_{j-1}=B_{j-1}(1+r_j)$. Repeating this step yields $B_n=(S+G)\prod_{j=1}^{n}(1+r_j)$. This is a projection rule under the assumed compound scale; it does not establish that any future $r_j$ will be declared.

Worked Example: Projecting Alternative Compound Rates

A hypothetical endowment has a $50,000 sum assured and $5,000 of declared additions included in its benefit base. It has three years to maturity. For this example, the illustrative compound rate is applied annually to the full projected benefit base at the beginning of each year. Compare a constant 2.00% annual assumption with a constant 1.50% assumption. Assume no other additions, claims, or lapses.

Method. Start with the sum assured plus declared additions, then apply the stated annual compound rate for each of the three years. Keep full precision during the calculation and round only the final benefits to the cent.

The initial benefit base is $B_0=\$50{,}000+\$5{,}000=\$55{,}000$. Under the 2.00% assumption, the projected values are

\begin{aligned} B_1&=\$55{,}000(1.02)=\$56{,}100,\\ B_2&=\$56{,}100(1.02)=\$57{,}222,\\ B_3&=\$57{,}222(1.02)=\$58{,}366.44. \end{aligned}

Thus the illustrated maturity benefit under the 2.00% assumption is $58,366.44. Under the 1.50% assumption, the calculation is

\begin{aligned} B_1&=\$55{,}000(1.015)=\$55{,}825,\\ B_2&=\$55{,}825(1.015)=\$56{,}662.375,\\ B_3&=\$56{,}662.375(1.015)=\$57{,}512.310625. \end{aligned}

Rounded to the cent, the second illustrated maturity benefit is $57,512.31. The difference, calculated before rounding, is $\$58{,}366.44-\$57{,}512.310625=\$854.129375$, or $854.13 to the cent. Common mistake avoided: applying each year's rate only to the original sum assured. That would not follow the assumed compound scale, which applies the rate to the stated benefit base at the start of each year. Both outcomes remain conditional illustrations; neither future rate is vested merely because it appears in the projection.

How to Read and Present Alternative Outcomes

A clear comparison keeps the contractual position and the scenario assumptions visible side by side. In particular, it identifies which additions are already declared, what base each future rate uses, how long the assumed rates apply, and what event the projected amount represents. When two scenarios differ, explain the difference in terms of the changed assumptions rather than implying that one outcome is certain.

Item	Declared addition	Future illustrative rate
Status	Already declared under the policy terms	Assumed for a projection; not yet declared
Amount in a calculation	Included as specified by the contract	Calculated conditionally using the stated scale and base
What may change	Its treatment depends on the contract	The assumed rate, duration, or applicable scale may change
How to describe the result	Part of the benefit on the stated contractual basis	An illustrated outcome, not a guaranteed future benefit

An illustration is useful for showing sensitivity: the compound example shows that a half-percentage-point change in the assumed rate changes the projected maturity amount. It is not evidence that either rate will be declared. A sound presentation therefore names the rate scenario and retains the qualification that it is illustrative.

This distinction is aligned with the SOA Exam ALTAM (Advanced Long-Term Actuarial Mathematics) syllabus: the calculation must reflect the stated bonus basis, while the interpretation must distinguish an existing contractual addition from a future assumption. Keep any assumptions about policy continuation and the claim event explicit. A projection for maturity, for example, is not automatically a projection of the amount payable on an earlier death or surrender.

Common Exam Traps

Calling an illustrated future addition guaranteed. A projected amount is conditional on the assumed future declarations; it is not vested merely because it is shown in an illustration.
Using the wrong bonus base. A rate on original sum assured produces simple additions; a rate on the accumulated benefit base produces compound growth. Read the scale definition before calculating.
Mixing rates and units. If a scale is stated in dollars per $1,000, convert the sum assured to $1,000 units before multiplying.
Omitting additions already declared. Start with the contractual benefit basis, including declared additions when the terms include them, and then project future additions separately.
Presenting one scenario as a forecast with certainty. State that the result follows from the assumed scale and conditions, not that the future rate will necessarily be declared.

Key takeaway: A declared addition and an illustrative future rate have different statuses. Include existing declared additions according to the contract; apply future rates only as conditional assumptions, using the bonus base and timing specified by the scale.

Check Your Understanding

For each problem, distinguish additions already declared from future assumptions. Unless a question states otherwise, assume the hypothetical policy remains in force to maturity and has no other additions or claim events.

A policy has a $80,000 sum assured and $6,000 of declared additions included in its maturity benefit. A simple annual bonus rate of 1.25% of sum assured is illustrated for four future years. What maturity benefit does this scenario illustrate? (Answer: $90,000)
A policy has a $120,000 sum assured and $9,000 of declared additions. Its next three simple rates are $12, $15, and $18 per $1,000 of sum assured. Calculate the illustrated maturity benefit. (Answer: $134,400)
A $40,000 sum-assured policy has $4,000 of declared additions in its benefit base. A 1.50% annual compound rate on the benefit base at the start of each year is illustrated for two years. What is the maturity benefit, to the cent? (Answer: $45,329.90)
A policy has a $100,000 sum assured and $7,000 of declared additions. Compare two years of simple future additions under two alternative scales: 2.40% of sum assured each year, or 1.80% each year. Find each illustrated maturity benefit and the difference. (Answer: $111,800 under 2.40%; $110,600 under 1.80%; difference $1,200)

What You'll Learn