Northwestern Mutual = Bernie Madoff?

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Lex123's picture
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Has anyone seen the returns of Northwestern Mutual? Bernie Madoff wasn't this consistent!  8% in policy dividends year after year.  In 2008 in spite of the worst financial crisis since the Great Depression they reported a 6.5% return.  My father in law (who swears by this company) claims it is because they are a mutual.  I don't believe it.  What's the catch?

anonymous's picture
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A dividend isn't a return.  Unlike Bernie Madoff, there is no reason for cooking the books. 
 
Being a mutual is very helpful.  Mutuals don't have to worry about quarter to quarter results and can do what is best long term. 
 
If I'm not mistaken, I believe that Guardian was actually able to raise their dividend this year.  I would expect all of the mutuals to have to lower them next year.

Lex123's picture
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I don't sell insurance so perhaps you can clarify it for me.  How is a dividend not a return?  If you received 8% in dividends, then didn't your cash value grow by 8%?

Anonymous's picture
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Is this a serious post?

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Northwestern is a madoff feeder fund 

Lex123's picture
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Yes, I'm dead serious.  My father in law just showed me their returns (or rather dividends) for the last 28 years and it is between 8-10% year in and year out.  Difficult to believe.  Sure beats the heck out of American Funds.  I think I'm going to jump ship for Northwestern Mutual.

BerkshireBull's picture
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Lex123 wrote:Yes, I'm dead serious.  My father in law just showed me their returns (or rather dividends) for the last 28 years and it is between 8-10% year in and year out.  Difficult to believe.  Sure beats the heck out of American Funds.  I think I'm going to jump ship for Northwestern Mutual.It's a return of premium, not a dividend as with a stock.  There's a reason Northwestern's dividends are not taxable.  I'd imagine your return over time would be closer to 4-5% on a tax-free basis as long as you don't lapse the policy.  Not too shabby a rate of return, but definitely not 8-10% unless you bought UL's back in the early 80s, their illustrations showed numbers that high, unfortunately they didn't do quite so well!

deekay's picture
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It is considered a return of premium for taxation purposes, but the dividend represents excess profits.  When a mutual company has less than expected death claims, lower than expected expenses, and/or higher than expected returns in the general account, the company returns a percentage to the policy holder.  The percentage means nothing to the individual.  Someone who takes out a WL policy will not get an 8% dividend in the first year.  Likewise, someone who's held a WL policy for 30 years+ can see their CSV grow by much more than 8% when a dividend is paid. 
 
Berkshire is right. The long term performance of WL is around 4-5% tax free.  Which is very good considering the lack of risk the policy holder takes, along with the liquidity the CSV offers.  However, the permanent death benefit is the most important feature of a WL policy.  When you can show how a client can have $0 CSV and be better off with a permanent policy than without it, you really add value. 

Lex123's picture
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Hmmmm....return of premium.  So you are saying policyowners are getting their own money back and (at least some) are fooled into thinking that they are getting high returns.  I don't mean to overstate the case, but going back to my original thesis, isn't that the definition of a Ponzi scheme?
deekay -- It's certainly hard to believe that any insurance company posted "excess profits" in 2008. 
 
Perhaps the mutual companies simply overcharge premiums so there will be policy dividends to return?

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Lex123 wrote: Hmmmm....return of premium.  So you are saying policyowners are getting their own money back and (at least some) are fooled into thinking that they are getting high returns.  I don't mean to overstate the case, but going back to my original thesis, isn't that the definition of a Ponzi scheme?
deekay -- It's certainly hard to believe that any insurance company posted "excess profits" in 2008. 
 
Perhaps the mutual companies simply overcharge premiums so there will be policy dividends to return?

It's the definition of an investor not understanding the product they purchased... it's not a Ponzi scheme.

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Lex, if you are going to be a decent advisor, you have a responsibility to understand how financial products work. 

 
Because the insurance company is guaranteeing the premium and death benefit, they must charge a premium that allows them to make good on this promise.  They do this by assuming that their mortality expenses will be high, their operating expenses will be high, and their investments will perform poorly.    When this doesn't happen, the insurance company is able to pay a dividend.  The big mutual insurance companies have always been able to pay dividends.
 
Lex, a ponzi scheme pays old investors with the money from new investors.  A mutual insurance company pays its owners actual profits from the company.  Please explain how this can possibly be confused for a ponzi scheme.
 
Your problem is that you are confusing "dividend" with "rate of return".  The terms aren't synonymous.

BerkshireBull's picture
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anonymous wrote:Lex, if you are going to be a decent advisor, you have a responsibility to understand how financial products work. 

 
Because the insurance company is guaranteeing the premium and death benefit, they must charge a premium that allows them to make good on this promise.  They do this by assuming that their mortality expenses will be high, their operating expenses will be high, and their investments will perform poorly.    When this doesn't happen, the insurance company is able to pay a dividend.  The big mutual insurance companies have always been able to pay dividends.
 
Lex, a ponzi scheme pays old investors with the money from new investors.  A mutual insurance company pays its owners actual profits from the company.  Please explain how this can possibly be confused for a ponzi scheme.
 
Your problem is that you are confusing "dividend" with "rate of return".  The terms aren't synonymous.If you want to get really confused, Lex, there are many large Mutual insurance companies who are non-participating and do not pay a dividend as well!

Moraen's picture
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u guyz r idiauots. Lex works for a big wire (maybe even the "clear" leadur). He knows more about finanz than u. if he sez itz a ponsi skeme, thin it is.

success's picture
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In a nushell, there policy premiums are inflated and they return a portion of it in the form of a "dividend."  They are not paying 8% on the cash.  They cant b/c the cash they are investing on their end isnt making 8%.  Impossible.

anonymous's picture
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success wrote:In a nushell, there policy premiums are inflated and they return a portion of it in the form of a "dividend."  They are not paying 8% on the cash.  They cant b/c the cash they are investing on their end isnt making 8%.  Impossible.

 
A company doesn't need to make 8% on their investments to pay out 8%.   Don't forget that the insurance company is a business and they make money from this business.   They make lots of money from people who buy term insurance, disability insurance, annuities, from other businesses that they own, permanent policies that get canceled, etc.

Lex123's picture
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I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.
 
 

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Lex123 wrote:I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.
 
 
 
deekay wrote:It is considered a return of premium for taxation purposes, but the dividend represents excess profits.  When a mutual company has less than expected death claims, lower than expected expenses, and/or higher than expected returns in the general account, the company returns a percentage to the policy holder.  The percentage means nothing to the individual.  Someone who takes out a WL policy will not get an 8% dividend in the first year.  Likewise, someone who's held a WL policy for 30 years+ can see their CSV grow by much more than 8% when a dividend is paid. 

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Lex123 wrote:I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.Maybe I can help.....Let's say, you need to refill the LP tank for your double-wide trailer home. So, you get on your horse and go down to the General Store and speak to old man Brady. But, he knows your kind, and he's not taking the trip all the way out to Cactus Hill to fill your tank unless you pay first. So you pay him $100...Now, he's filled your tank before and he is pretty sure it's only going to cost $92, but he charges a little more just in case you might need a little more. But he comes out and thanks to good energy management (on your part), it comes to exactly $92. So Old Man Brady gives you $8 and drives away in the LP truck. You're so excited, you crank up your phone and call your Maw to tell her you made an 8% return on your LP investment. You're disappointed when your Maw says, "You dumbass! That's not a return on investment, it's just a return on unused premium"So you open a beer and stare at the pile of burning tires...

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Still@jones wrote:
Lex123 wrote:I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.Maybe I can help.....Let's say, you need to refill the LP tank for your double-wide trailer home. So, you get on your horse and go down to the General Store and speak to old man Brady. But, he knows your kind, and he's not taking the trip all the way out to Cactus Hill to fill your tank unless you pay first. So you pay him $100...Now, he's filled your tank before and he is pretty sure it's only going to cost $92, but he charges a little more just in case you might need a little more. But he comes out and thanks to good energy management (on your part), it comes to exactly $92. So Old Man Brady gives you $8 and drives away in the LP truck. You're so excited, you crank up your phone and call your Maw to tell her you made an 8% return on your LP investment. You're disappointed when your Maw says, "You dumbass! That's not a return on investment, it's just a return on unused premium"So you open a beer and stare at the pile of burning tires...ROTFLMAO!!!!Someone's feisty this morning

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Still@jones wrote: Lex123 wrote:I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.Maybe I can help.....Let's say, you need to refill the LP tank for your double-wide trailer home. So, you get on your horse and go down to the General Store and speak to old man Brady. But, he knows your kind, and he's not taking the trip all the way out to Cactus Hill to fill your tank unless you pay first. So you pay him $100...Now, he's filled your tank before and he is pretty sure it's only going to cost $92, but he charges a little more just in case you might need a little more. But he comes out and thanks to good energy management (on your part), it comes to exactly $92. So Old Man Brady gives you $8 and drives away in the LP truck. You're so excited, you crank up your phone and call your Maw to tell her you made an 8% return on your LP investment. You're disappointed when your Maw says, "You dumbass! That's not a return on investment, it's just a return on unused premium"So you open a beer and stare at the pile of burning tires...
 
Brilliant post.

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Don't you dare ask an NML agent to explain this concept.  To them it is a rate of return, easily compared to the historical return of the S&P 500, lol. 

Runlong's picture
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That was too funny! You just made my afternoon!
 
 

svm21's picture
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theironhorse wrote:Don't you dare ask an NML agent to explain this concept.  To them it is a rate of return, easily compared to the historical return of the S&P 500, lol.  I hear ya man. As an intern/Financial Rep at NWM I cornered my boss regarding the return on whole life insurance vs equities. To sum it up, he drowned. He pulled up a graph of the S & P 500 over the past 15 years and tried to prove that whole life would have performed better. Less then two minutes later, he realized that he had indeed proved my point and finished with,"Well, thats not the norm, and you have to consider the tax beneifits,CSV, not to mention the death benefit." I responded with "What good does that do me now? I plan on retiring when I'm alive." I also had a rep state, "I don't believe in investing. I put all my money into whole life insurance."  I also had a rep state, " Wow, I just sold my first mutual fund." As a standalone comment, not to disturbing, until you consider the fact that he had been their three years.  Northwestern is not a ponzi scheme. It is an animal we have never seen before. It's a bad sign when they ask you to write down the top 20 people you know that are successful before you even get hired. Its also a bad sign when your "boss" calls all the interns in to his office one by one and begs for names of hiring referrals. The place has more kool-aid then a black person's fridge.

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Still@jones wrote: Lex123 wrote:I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.Maybe I can help.....Let's say, you need to refill the LP tank for your double-wide trailer home. So, you get on your horse and go down to the General Store and speak to old man Brady. But, he knows your kind, and he's not taking the trip all the way out to Cactus Hill to fill your tank unless you pay first. So you pay him $100...Now, he's filled your tank before and he is pretty sure it's only going to cost $92, but he charges a little more just in case you might need a little more. But he comes out and thanks to good energy management (on your part), it comes to exactly $92. So Old Man Brady gives you $8 and drives away in the LP truck. You're so excited, you crank up your phone and call your Maw to tell her you made an 8% return on your LP investment. You're disappointed when your Maw says, "You dumbass! That's not a return on investment, it's just a return on unused premium"So you open a beer and stare at the pile of burning tires...

I like it.  Very funny.  Not accurate, but very funny. 

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svm21 wrote: theironhorse wrote:Don't you dare ask an NML agent to explain this concept.  To them it is a rate of return, easily compared to the historical return of the S&P 500, lol.  I hear ya man. As an intern/Financial Rep at NWM I cornered my boss regarding the return on whole life insurance vs equities. To sum it up, he drowned. He pulled up a graph of the S & P 500 over the past 15 years and tried to prove that whole life would have performed better. Less then two minutes later, he realized that he had indeed proved my point and finished with,"Well, thats not the norm, and you have to consider the tax beneifits,CSV, not to mention the death benefit." I responded with "What good does that do me now? I plan on retiring when I'm alive." I also had a rep state, "I don't believe in investing. I put all my money into whole life insurance."  I also had a rep state, " Wow, I just sold my first mutual fund." As a standalone comment, not to disturbing, until you consider the fact that he had been their three years.  Northwestern is not a ponzi scheme. It is an animal we have never seen before. It's a bad sign when they ask you to write down the top 20 people you know that are successful before you even get hired. Its also a bad sign when your "boss" calls all the interns in to his office one by one and begs for names of hiring referrals. The place has more kool-aid then a black person's fridge.

1) Your boss was/is an idiot. 
2) You were an idiot for asking for a comparison between WL and equities.  That's ok.   Everyone at the beginning stages of their career are idiots.
3)If you plan on retiring alive and don't understand the value that whole life would have to you personally, then you haven't progressed out of the idiot stage.  That would not be good.

Northwestern Kool-Aid is on par with Eddie Jones Kool-Aid.  Do black people drink lots of Kool-Aid?

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1) Correct2) Wrong, in that branch the two were compared daily. I went into that office to prove a point. I already new the answer. I just wanted to see him squirm.3) I'm not touching this one.4) No, just no.5) Yes, its common knowledge.

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I wasn't comparing Northwestern to Eddie Jones.  I was comparing Northwestern Kool-Aid to Eddie Jones Kool Aid.
As far as companies go, Northwestern is phenomenal.   They are as financially strong as any company in any industry.  Is it a good place to work?  For some people, it is.  I wouldn't want to work there.
 
I'm a knowledgeable guy.  How come I don't know about this black people drinking Kool-Aid thing?

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Lex123 wrote:I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.
 
 

 
I don't think anyone has really answered Lex's question yet, but I think an actual example with numbers may shed some light.  And I'll be the first to admit that I don't really understand Whole Life Insurance myself, so if the numbers I give in my question/example are ridiculous, please excuse me.
 
Let's assume that a client has a Whole Life policy with the following characteristics:
 
-Face Value $1,000,000
-Cash Value $100,000
-Annual Premium $10,000
-Total Cumulative Premium Contributions $80,000
 
Now, let's assume the insurer declares an 8% "dividend" for that policy.  Exactly how much money does that come out to?  It is obviously not 8% of the $1M face value.  Is it 8% of the $100,000 cash value?  Is it 8% of the $10,000 annual premium?  Is it 8% of the cumulative contributions of $80,000?
 
If someone who understands Whole Life coulde answer this questions, I think it would help both Lex and myself.

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The 8% dividend is the amount of profits the insurer gives back to the entire group of policyholders who are entitled to it.  In other words, if you own a participating life, disability or LTC policy, you're getting a cut.  To keep things simple, let's focus only on the life insurance.  Your cut of this 8% is determined primarily by your age, how long you've owned the policy and your tobacco status.  To say every policy holder gets 8% in a given year is flat wrong.  I have clients who just bought a WL policy and got no dividend in the first year.  I have clients who have owned WL for many years and see their CSV go up much higher than the dividend rate every year. 
 
To summarize, the dividend rate is irrelevent to the individual policy holder.  It is, however, a good signal of the profitability of a company and their stewardship.  If an agent is touting the 8% dividend as the main reason one should own WL, they don't know the product or how to utilize it.  I sell WL reguarly and don't bring out an illustration until it's legally necessary, and generally I don't even discuss CSV unless its brought up.  Why?  Because, as anonymous has stated, the death benefit is the single most important part of a permanent life insurance policy.  Understanding how to utilize the permanent DB to enhance a client's retirement is one of the truly great ways to add value.

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deekay wrote:The 8% dividend is the amount of profits the insurer gives back to the entire group of policyholders who are entitled to it.  In other words, if you own a participating life, disability or LTC policy, you're getting a cut.  To keep things simple, let's focus only on the life insurance.  Your cut of this 8% is determined primarily by your age, how long you've owned the policy and your tobacco status.  To say every policy holder gets 8% in a given year is flat wrong.  I have clients who just bought a WL policy and got no dividend in the first year.  I have clients who have owned WL for many years and see their CSV go up much higher than the dividend rate every year. 
 
To summarize, the dividend rate is irrelevent to the individual policy holder.  It is, however, a good signal of the profitability of a company and their stewardship.  If an agent is touting the 8% dividend as the main reason one should own WL, they don't know the product or how to utilize it.  I sell WL reguarly and don't bring out an illustration until it's legally necessary, and generally I don't even discuss CSV unless its brought up.  Why?  Because, as anonymous has stated, the death benefit is the single most important part of a permanent life insurance policy.  Understanding how to utilize the permanent DB to enhance a client's retirement is one of the truly great ways to add value.
 
so why not sell universal life and save the client the excessive cost of whole life?

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"so why not sell universal life and save the client the excessive cost of whole life?"
 
What makes you think that UL is cheaper than WL (participating policy from a mutual company)? 
 
You need to understand pricing.  Insurance pricing must be done in such a way that guarantees that the insurance company can pay claims.  This means that they must assume that their investments won't do very well, their expenses will be high, and people will die sooner than expected.
 
What happens when this trifecta of bad events doesn't happen?  With a WL policy, the policy owner's benefit via dividends.  With a UL policy, the policy owners don't benefit.  It is stock holders who benefit.
 
For someone who is not already old, UL only beats WL if WL stops paying dividends.
 
UL becomes very dangerous as one ages because of the ever increasing cost of insurance.  People get older.  The 70 year old who bought a UL policy when they were 40 is now paying the rates of a 70 year old.  With a WL policy, they are still paying the rates of a 40 year old.
 
If a 40 year old needs $1,000,000 of coverage and is willing to spend $300/month and wants some permanent protection, they will be much better served by buying a WL/term combo than UL.

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ETF_Advisor wrote:Lex123 wrote:I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.
 
 

 
I don't think anyone has really answered Lex's question yet, but I think an actual example with numbers may shed some light.  And I'll be the first to admit that I don't really understand Whole Life Insurance myself, so if the numbers I give in my question/example are ridiculous, please excuse me.
 
Let's assume that a client has a Whole Life policy with the following characteristics:
 
-Face Value $1,000,000
-Cash Value $100,000
-Annual Premium $10,000
-Total Cumulative Premium Contributions $80,000
 
Now, let's assume the insurer declares an 8% "dividend" for that policy.  Exactly how much money does that come out to?  It is obviously not 8% of the $1M face value.  Is it 8% of the $100,000 cash value?  Is it 8% of the $10,000 annual premium?  Is it 8% of the cumulative contributions of $80,000?
 
If someone who understands Whole Life coulde answer this questions, I think it would help both Lex and myself.

 
Part of the confusion is that it is incorrect to say that insurers declare an "8% dividend."  You should never hear an insurance company say this.  Instead they have a "dividend crediting rate of 8%".
 
This number is then used to help determine the total amount of dividends that that the insurer can pay.  It doesn't have meaning for an individual policy.  I believe that Northwestern paid about $5,000,000,000 in dividends last year.   This money is split "equitably" between all participating policy holders. 

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anonymous wrote:
If a 40 year old needs $1,000,000 of coverage and is willing to spend $300/month and wants some permanent protection, they will be much better served by buying a WL/term combo than UL.

Why isn't the same client better served by buying term/no-load MF combination?

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Are taxes a concern?

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LockEDJ wrote: anonymous wrote:
If a 40 year old needs $1,000,000 of coverage and is willing to spend $300/month and wants some permanent protection, they will be much better served by buying a WL/term combo than UL.

Why isn't the same client better served by buying term/no-load MF combination?

Notice the "and wants some permanent protection" part of the statement.

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One thing NML seems to do really well is to get their clients to buy into their angle of being the best product out there.  I for one would be curious how they create such loyalty to their products.  On a side note, I have run across more than one person who is convinced they are getting an 8% return on their cash value, some get it when I explain how it works, some choose to stay ignorant.

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anonymous wrote:
"so why not sell universal life and save the client the excessive cost of whole life?"
 
What makes you think that UL is cheaper than WL (participating policy from a mutual company)? 
 
You need to understand pricing.  Insurance pricing must be done in such a way that guarantees that the insurance company can pay claims.  This means that they must assume that their investments won't do very well, their expenses will be high, and people will die sooner than expected.
 
What happens when this trifecta of bad events doesn't happen?  With a WL policy, the policy owner's benefit via dividends.  With a UL policy, the policy owners don't benefit.  It is stock holders who benefit.
 
For someone who is not already old, UL only beats WL if WL stops paying dividends.
 
UL becomes very dangerous as one ages because of the ever increasing cost of insurance.  People get older.  The 70 year old who bought a UL policy when they were 40 is now paying the rates of a 70 year old.  With a WL policy, they are still paying the rates of a 40 year old.
 
If a 40 year old needs $1,000,000 of coverage and is willing to spend $300/month and wants some permanent protection, they will be much better served by buying a WL/term combo than UL.

 
A flexible premium UL will outperform whole life on the cash accumulation side
 
Likewise a GUL will provide a significantly greater death benefit than whole life for the same premium dollar.
 
I see a lot of whole life sales as a product that's sold by agents looking for a quick buck who don't want to take the time to factfind. How hard is it to ask someone: "what do you want your life insurance to do for you?"  Find out and program out their life insurance for them.
 
Otherwise you can just sling whole life and have them take paid-up additions with their dividends and every year their death benefit will be more than they needed or wanted and they'll pay extra for it.  Then 25 years from now you or some other agent can take their whole life cash value 1035 it into an annuity and get paid again.
 
I agree with your synopsis on buying from mutual companies though, the policyholders are the owners and they enjoy more stability than those who have policies with stock companies.

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BerkshireBull wrote:anonymous wrote:
"so why not sell universal life and save the client the excessive cost of whole life?"
 
What makes you think that UL is cheaper than WL (participating policy from a mutual company)? 
 
You need to understand pricing.  Insurance pricing must be done in such a way that guarantees that the insurance company can pay claims.  This means that they must assume that their investments won't do very well, their expenses will be high, and people will die sooner than expected.
 
What happens when this trifecta of bad events doesn't happen?  With a WL policy, the policy owner's benefit via dividends.  With a UL policy, the policy owners don't benefit.  It is stock holders who benefit.
 
For someone who is not already old, UL only beats WL if WL stops paying dividends.
 
UL becomes very dangerous as one ages because of the ever increasing cost of insurance.  People get older.  The 70 year old who bought a UL policy when they were 40 is now paying the rates of a 70 year old.  With a WL policy, they are still paying the rates of a 40 year old.
 
If a 40 year old needs $1,000,000 of coverage and is willing to spend $300/month and wants some permanent protection, they will be much better served by buying a WL/term combo than UL.

 
A flexible premium UL will outperform whole life on the cash accumulation side
 
Assuming interest rates are high, expenses are low, and the client continues to fund the policy.  Otherwise, I find this hard to believe.
 
Likewise a GUL will provide a significantly greater death benefit than whole life for the same premium dollar.
 
GUL will start out with a higher DB, but it may not end up that way.  If you combine a smaller amount of WL with term, you can make up the DB difference.
 
I see a lot of whole life sales as a product that's sold by agents looking for a quick buck who don't want to take the time to factfind. How hard is it to ask someone: "what do you want your life insurance to do for you?"  Find out and program out their life insurance for them.
 
Funny, I find that those who only sell UL are the ones who are looking to make a quick buck.  They say, "Hey look!  My premium is half his, therefore my product is better."  The clients who want their DB to last forever want WL after I describe how they can never miss a payment on their GUL.  They like how they can miss a payment on their WL and still maintain coverage.  They like the flexibility WL offers.  Of course, the undeducated will point to how UL is "flexible premium" and have had it indoctrinated that WL is "inflexible".
 
Otherwise you can just sling whole life and have them take paid-up additions with their dividends and every year their death benefit will be more than they needed or wanted and they'll pay extra for it.  Then 25 years from now you or some other agent can take their whole life cash value 1035 it into an annuity and get paid again.
 
You don't have to just use dividends to buy PUA.  What I find is that my clients want to have their DB increase to offset the effects of inflation.  As far as overpaying for WL, typically premiums=CSV in year 18-20.  Everything after that is free insurance.  I fail to see how "they'll pay extra for it."
 
I agree with your synopsis on buying from mutual companies though, the policyholders are the owners and they enjoy more stability than those who have policies with stock companies.

Understand GUL has its' place.  I am working on a case for a 73 year old for a buy-sell where GUL is the only option, given budgetary concerns.  If he could afford to, he'd buy WL in a heart beat.  He loves his par WL policies he bought 30 years ago.  He's said again and again he wishes he could buy more.

BerkshireBull's picture
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Assuming interest rates are high, expenses are low, and the client continues to fund the policy.  Otherwise, I find this hard to believe.
 
An underfunded UL will not outperfom a fully-funded whole life, I completely agree.  If the client can't afford to fully fund it in the future at least he can continue his insurance.  What happens if someone doesn't continue to fund your whole life?
 
 
GUL will start out with a higher DB, but it may not end up that way.  If you combine a smaller amount of WL with term, you can make up the DB difference.
 
So by selling term insurance as part of the plan you can make up the difference of your expensive WL and get as much death benefit as a GUL offering permanent insurance for life.  How much permanent insurance will they have when the term runs out?
 
 
Funny, I find that those who only sell UL are the ones who are looking to make a quick buck.  They say, "Hey look!  My premium is half his, therefore my product is better."  The clients who want their DB to last forever want WL after I describe how they can never miss a payment on their GUL.  They like how they can miss a payment on their WL and still maintain coverage.  They like the flexibility WL offers.  Of course, the undeducated will point to how UL is "flexible premium" and have had it indoctrinated that WL is "inflexible".
 
I see a lot of poorly setup ULs, don't get me wrong, but a lot of people selling ULs also believe term is a great product and have no problem using that as well so I see more suitable programs unlike the "WL or nothing crowd." 
 
 
You don't have to just use dividends to buy PUA.  What I find is that my clients want to have their DB increase to offset the effects of inflation. 
 

Why are you using the dividends to increase the face instead of lowering their premium?  Aren't their kids getting older making their income replacement obligation smaller and their debts lower making their debt repayment obligations smaller?  What are you trying to accomplish by increasing the face with paid up additions, estate preservation?
 
As far as overpaying for WL, typically premiums=CSV in year 18-20.  Everything after that is free insurance.  I fail to see how "they'll pay extra for it."
 
You say that to the wrong prerson and you'll find yourself out of this business in a hurry.

deekay's picture
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BerkshireBull wrote:
 
An underfunded UL will not outperfom a fully-funded whole life, I completely agree.  If the client can't afford to fully fund it in the future at least he can continue his insurance.  What happens if someone doesn't continue to fund your whole life?
 
If the client cannot continue to fund the policy, they can take a reduced paid-up policy.  They can take policy loans off the CSV to pay the premium.  They can have the dividends go to cash.  They can have the dividends pay the premium.  They can surrender the policy.  There are a lot of options.  UL (especially GUL) has two:  pay the premium, or hope the CSV sticks around long enough until the client can afford to continue paying.
 
So by selling term insurance as part of the plan you can make up the difference of your expensive WL and get as much death benefit as a GUL offering permanent insurance for life.  How much permanent insurance will they have when the term runs out?
 
The goal is to convert the term to permanent over time as the client's budget increases.  For example, client buys $500k of par WL with a $1mm term rider.  We convert the term in blocks of $100k or so over time for the next 10 years.  His premiums are now locked in for life, his CSV is growing nicely, dividends are becoming fairly substantial.  Depending on how quickly this happens, he then is free to continue to fund the policy out of pocket or use the aforementioned options for his policy.
 
 
 
I see a lot of poorly setup ULs, don't get me wrong, but a lot of people selling ULs also believe term is a great product and have no problem using that as well so I see more suitable programs unlike the "WL or nothing crowd." 
 
Term is a great product - for the short term.  I'm certainly not a 'WL or nothing" guy.  I own a ton of term on me.  I present GUL when appropriate.  I practice what I preach.  What I find is that many people who only use UL truly don't understand how easily it can blow up (even GULs).  Again, miss one GUL payment and all the guarantees could be lost.
 
 

Why are you using the dividends to increase the face instead of lowering their premium?  Aren't their kids getting older making their income replacement obligation smaller and their debts lower making their debt repayment obligations smaller?  What are you trying to accomplish by increasing the face with paid up additions, estate preservation?
 
If you bothered to read my earlier post, many of my clients like the idea of buying PUAs to increase the DB to counterract the impact inflation has.  They don't have to - they are free to pay down premium, take the dividend in cash, whatever.  And yes, increasing the DB provides the best chance of preserving an estate.  As far as knowing what their 'needs' are in the future, that's a 20-30 year prediction that I am not going to try to guess.  But the fact is, if you understand how to utilize a permanent death benefit in retirment and income planning, you will give your clients many more options than without a permanent DB.
 
 
 You say that to the wrong prerson and you'll find yourself out of this business in a hurry.
 
You're right.  I always let my clients know it could be 23-25 years before this happens.  It could happen in 15-16 years.  It could never happen if they take loans out too soon.  Anybody who knows me knows I am quick to point out that illustrations are illusions.  So, we focus on guaranteed premium, guaranteed DB, guaranteed CSV.  Everything else is gravy.

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LockEDJ wrote: anonymous wrote:

If a 40 year old needs $1,000,000 of coverage and is willing to spend $300/month and wants some permanent protection, they will be much better served by buying a WL/term combo than UL.
Why isn't the same client better served by buying term/no-load MF combination?
 
It's apples vs. oranges.   The money that would be going into a life insurance policy is not money that would otherwise be invested in equities. 

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Berkshire Bull, at the same dollar figure, the only time that UL is going to be better than WL is at older ages using a GUL. 
 
There are a couple of problems with UL.  Primarily, it is because UL is really annually renewable term insurance combined with a side fund.  ART is not designed to be kept long term.  The increasing cost of insurance makes it very hard to not ultimately have a UL policy lapse.  The other issue is that insurance costs must always be priced high to protect the insurance company.  With a UL, the policyholder doesn't benefit when the mortality is less than assumed. 
 
You asked about what happens with a term/WL policy when the term runs out.  Because the WL policy grows, it will ultimately provide a greater death benefit than the UL.

BerkshireBull's picture
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anonymous wrote:Berkshire Bull, at the same dollar figure, the only time that UL is going to be better than WL is at older ages using a GUL. 
 
There are a couple of problems with UL.  Primarily, it is because UL is really annually renewable term insurance combined with a side fund.  ART is not designed to be kept long term.  The increasing cost of insurance makes it very hard to not ultimately have a UL policy lapse.  The other issue is that insurance costs must always be priced high to protect the insurance company.  With a UL, the policyholder doesn't benefit when the mortality is less than assumed. 
 
You asked about what happens with a term/WL policy when the term runs out.  Because the WL policy grows, it will ultimately provide a greater death benefit than the UL.You do realize that 95% of the people you're selling whole life to will not carry the policy through to their death, right?What will happen to the person who wanted a permanent death benefit and instead of buying permanent bought part perm and part term?  The term will drop in 20 or 30 years and the whole life will never match the death benefit of the GUL unless you live longer than the actuary tables or interest rates rise dramatically and for someone looking for LI for a permanent death benefit that's a gamble with WL that most people won't win.

anonymous's picture
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"You do realize that 95% of the people you're selling whole life to will not carry the policy through to their death, right?"
 
I don't realize that at all.  I believe that I've had more death claims than people drop policies.  Most of my lapses were my fault from earlier in my career.  I sold too much premium.  I can't remember the last time that I had someond drop a whole life policy.  The key is that it needs to be sold at a premium that is easy to handle. 
"What will happen to the person who wanted a permanent death benefit and instead of buying permanent bought part perm and part term?  The term will drop in 20 or 30 years and the whole life will never match the death benefit of the GUL unless you live longer than the actuary tables or interest rates rise dramatically and for someone looking for LI for a permanent death benefit that's a gamble with WL that most people won't win."
 
It's obvious that you haven't been selling long and your experience comes from looking at illustrations and not seeing what happens with real people.   Unexpected things happen in life.  If 20 years from now, the person runs into difficulties, they can't not pay out of pocket on their GUL policy and keep the guarantees.  They will be able to do it with a WL policy.   GUL takes away all flexibility. 
 
Let's assume that someone does pay their premium every year.  No matter how we slice it, for the same premium, the products are going to be close to equal or whole life/term will come out way ahead.  To make it as apples to apples as possible, I'll use a WL/term combo where the WL dividends convert the term portion to WL.  Let me give you some examples using a 30 year old client. 
 
1) Client dies immediately after paying first premium: The products are equal.
2) Client dies at a very old age: WL is much better.
3) Client dies anywhere between year 1 and whatever year all of the term gets converted: The products are equal.
4) Client is 70 and decides he doesn't want his policy any longer and cashes out: WL is much better.
5) Client is 70 and wants insurance for the rest of his life, but doesn't want to continue paying for insurance: WL is much much better.
6) Client is 45 and has run into some temporary cash flow issues: WL is much better.
 
GUL is only a superior solution if the client is already old.
 
 

financeer's picture
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Agree with anonymous.  Apples to oranges to bananas.  (WL to UL to equity)Dividend rate IS NOT a rate of return.  When I sell a WL policy I actually run the rate of return page.  Usually for a 25-50yo, the rate of return is about 1.5-2.5% lower than the dividend illustrated (from policy years 20-30+ on).  The rate of return is non-existant or low until this point because the policy fees from the first few years cause low cash value. ALSO if you are an agent, download FULL DISCLOSURE software to run example policies from all the major companies (that are willing to participate lol).  You can see 10/20/30 year comparisons of what actual policies have done.  The fun thing to check is the companies that have a higher divended but running identical premiums through different companies they end up with a lower rate of return (Mass Mutual has a higher dividend then NYL or NM but lower ROR). No product is the only/best answer.  I sell all of the above - my own personal money goes into everything - 401k, pension, ROTH, 529, Term insurance, and whole life.  UL is misused too much - should be for older clients or business cases primarily.   I am so sick of VUL being sold for college savings.  HELLO - 529?  I just met someone putting $750/mo into a VUL for college - the agent told them they could access it ALL tax free.  UMM MAYBE IF YOU DIED.  So sad.  gives insurance a bad name.  There are no bad products - just dumb/greedy agents looking to make $$$.  Client thinks he is in the greatest thing since sliced bread.  I am going to end up making 1/10 of the commission the first agent did when I recommend term/529. He doesn't have a personal long term insurance need and he has 6 kids - trying to take money systematically out of a VUL over 20 years while the insurance expenses go up = crazy.

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