Located some 20 or so miles north of Philadelphia, in the little town of Horsham, PA, is one of America’s oldest life insurers, Penn Mutual Life. This 165 year old life insurance company from the land of Ben Franklin, Crayola Crayons, and Hershy’s Chocolate manufactures a somewhat odd little whole life contract. And today, that odd little whole life contract will be the focus of our discussion.
The other (Forgotten) Mutual
We sometimes refer to Penn Mutual as the “Forgotten Mutual” because it’s interestingly snubbed by the big four (Northwestern, New York Life, Massmutual, and The Guardian). In fact, when Guardian decided it wanted to make a big deal about it’s surplus ratio, it started ordering fliers that promoted its rank as number 1 among peer competitors for Surplus and Asset Valuation Reserve (AVR). They either hired a summer intern to do their research, or intentionally decided to leave Penn off their list, because Penn trumps Guardian’s ratio by several 100 bps.
The Idiosyncratic Mutual
Penn does have a reputation for being a tad different when compared to its mutual brethren. Unlike the big 4 it manufactures an Indexed Universal Life product and does not deal in the disability or long term care markets. Also unlike the other mutuals, Penn has kept it’s Guaranteed Universal Life contract.
But even more interestingly different is its Whole Life Insurance portfolio. Unlike the big 4 (and the Mutual Holding Companies that are big players in the whole life market) Penn doesn’t have a lengthy list of products on the shelf designed for a myriad of different circumstances. In fact they only have one whole life product.
If you don’t have a deep appreciation for the many handy uses of whole life insurance and/or the inner workings of mutual life insurers, this fact on its face probably won’t mean much. It’s important to understand, however, that this is a really strange feature for a mutual.
If You’re Going to Have Just One, You’d Better Make it Count
We’ve already established that having just one whole life product is a weird thing for a mutual. With all the different planning situations, lots of companies manufacture various products for different purposes. And I suspect some of Penn’s internal sales force feels, at times, a little disadvantaged by this lack of options. However, it is called Flexible Choice, and that name–and this product–may be much more savvy than most would assume at first glance. More on this a little later, for now lets look at the details.
Facts and Figures
The product is available in all 50 states. Available Riders for individual case design include:
- Guaranteed Increase Option
- Disability Waiver
- Paid-up Additions (there are two actually)
- Accelerated Death Benefit
- Accidental Death Benefit
- Child Term
- Over-loan Protection
- Additional Term Benefit
The Guaranteed Increase Option allows for 7 increase option dates (which can be accelerated for certain qualifying events) and the maximum increase amount is $100,000 per option date.
Waiver of Premium
The Disability Waiver of Premium Rider has an industry leading 6 year own-occ definition of disability. It also uniquely has just a 4 month elimination period (most rider have a 6 month elimination period). There is a second waiver rider. It has a 2 year own-occ definition of disability. That’s the only difference. It’s not used very often.
Penn Mutual actually has two Paid-up Additions Riders. One is used for the additional term rider, the other is the rider used for over-funding purposes. Flexible is a bit of an understatement when it comes to describing this rider. It requires a minimum of $25 dollars paid every three years to remain active. The maximum is set at policy issue, and is underwritten (this creates a higher than normal underwriting amount, but well worth having the flexibility with respect to funding). The PUA load is 5% for both riders.
There is one little tricky provision to the Penn Contract regarding the Paid-up Additions rider. Penn charges 2% on top of it’s 5% charge for PUA purchases made when not purchased at policy anniversary. So, the natural piece of advice is, don’t make the PUA purchase unless at contract anniversary. The flexibility aspect (increasing and decreasing) is certainly superior to a lot of Penn’s competitors. This charge is weird, but completely manageable, but a potential stumble for a rookie.
Accelerated Death Benenefit
The Accelerated death benefit includes both a Terminal and Chronic illness benefit. The terminal side is pretty standard. Triggered if insured is diagnosed as with a terminal illness. The chronic benefit is triggered if the insured loses the ability to perform two of the six Activities of Daily Living; it’s also triggered if the insured requires 24 hour care due to physical or mental impairment. The benefit itself is capped at the lower of $250,000 or 50% of the total death benefit. The Accelerated Death Benefit Rider is available on all face amounts, and has no cost (there is a fee when triggered). The benefit is approved in all 50 states (it’s important to note that some states require certain variations).
Accidental Death Benefit
There is an available Accidental Death Benefit and just like all accidental death riders it’s usually not worth the time. It can be used to double the original death benefit up to a maximum of $250,000.
Child Term Rider
And rounding out the short list of mostly useless riders you can skip there is also a child term rider available. The minimum is $5,000 and the maximum is $25,000. The rider can be issued on a child at least 15 days old and no older than 17. There is a conversion option to permanent insurance up to the policy’s anniversary closest to the child’s age nearest 23. If the parent dies with the rider on his policy, the premiums will be waived until it’s expiration (child’s age 23); conversion option remains on the table while premiums are bring waived (new premiums on the conversion would not be paid, of course).
Very unique to Penn Mutual’s list of available whole life riders is an over-loan protection rider. In fact, it’s the only whole life contract we’re aware of that has an over-loan rider available. This benefit, typically reserved for Universal Life contracts kicks in if the loan balance totalls 99% of the policy’s cash surrender value and makes the policies reduce paid-up to avoid policy lapse.
Additional Term Rider
Staying true to form, Penn’s approach to policy blending is a tad different. Most contracts simply throw a term insurance policy on top of the whole life policy and stipulate a premium for the term insurance. You might (and the hope is you will) be able to keep the total death benefit by replacing the term insurance with paid-up additions. Some policies assume (somewhat dubiously) that the policy’s dividend performance will take care of replacing the term insurance. Other’s understand that a certain level of PUA’s will be necessary to replace the term. And yet more understand that blending is the key to turning whole life policies into nifty little cash piles.
On its face, Penn’s blended term rider looks extremely expensive. Like Northwestern Mutual expensive. But that observation would be the result of a haphazard once-over that didn’t dive a little deeper into what was actually going on. Penn has gone through the hassle of calculating roughly what the insured will need in terms of paid-up additions to replace the term insurance within a 20-30 year period, and it requires that those PUA’s be part of the rider. It’s s somewhat fool-proof blending for dummies provision (very nice). Also standing in the way between you an utter disaster is a rather limited whole life to term max blend. While a lot of companies will allow a 10:1 blend of term to whole life, Penn maxes out at 4:1. Again, at first pass this seems like a big disadvantage, but we couldn’t come up with any scenarios where it seemed like Penn significantly fell behind due to this.
In addition to this list of available riders, Penn Mutuals also has a list of riders available for business planning situations. Those riders include:
- Qualified Plan Surrneder
- Change of Plan
- Supplemental Exchange
- Paid-up Additions Offer
Despite calling them riders, they all are typically added automatically and have no costs associated with them.
Qualified Plan Surrender
This rider allows a business owner to surrender a policy held on an employee who terminated employment within the first two years. It refunds all premiums paid (minus a small cost for the One-year Term death benefit that was in force) by the employer.
Change of Plan
This rider allows the employer to switch permanent plans used within Penn’s available options. There’s no medical underwriting and the cash is transfered to the new policy.
This is a fairly common rider available for Employer-Owned Life Insurance. It allows the employer to switch the insured on the policy. The new employee must be underwritten for coverage.
Paid-up Additions Option
This is actually a somewhat unique and nifty rider. I’ll use a 412i situation to highlight the benefit.
If I establish a 412i with one company, I’m only going to have access to that company’s proprietary insurance products. If for some reason in the future I decide I want to switch to a different company, I can make the transfer, but I can’t normally transfer the cash value of a whole life policy into a new whole life policy. I instead have to cash the old policy within the 412i and transfer to the new 412i where it will go into annuities. This rider allows me to transfer cash values in a life policy to a new life policy within the plan.
To be clear, dividend options still needs to be set to reduce premium inside the 412i. This benefit only lets me transfer life insurance cash values into a new life insurance policy at Penn.
The Swiss Army Knife of Whole Life Insurance
The marketing department at Penn Mutual was wise to name this Flexible Whole Life Insurance. But usually a jack of all trades is a master of none; not the case here. Penn Mutual has a relatively low cost product, with incredible guaranteed cash values. It tops the Blease list for projected income analysis.
It can address a large number of planning situations, and it can do it quite well. On top of that, the other benefits it has available come along for the ride. You see, the Big 4 are well known for a dizzying list of life insurance products all laser focused on a specific need or situation. So in order to get that, you generally have to give up some other benefits. Sometimes this isn’t an issue, but not always.
Penn Mutual does use direct recognition for calculating dividends where policy loans exist. And in the first 10 years of the policy, this is a bit of a drag. However, after 10 years, Penn contractually promises to remove the spread used in the first 10 years to peg the dividend rate against cash values pledged as collateral to the loan interest rate.
Additionally, Penn uses a variable loan rate that is tied to the Moody’s Bond Index, and loan interest rate is due at the end of the policy year. Not in advance as is the case with a lot of companies.
Worth a Look
So, despite appearing as a lightweight with meager offerings. Penn Mutual has an extremely unique whole life product that is very malleable and able to accommodate a lot of different circumstances. On the cash accumulation side, this product is super flexible and able to accept varying cash flows with no trouble. It has the most flexible paid-up additions rider we’ve seen so far and a nearly bullet proof blending provision. For this, we like it a lot.
Underwriting experience (and from what we gathered talking to other agents) has been somewhat typical. Turn around is good. Underwriting aggressiveness is perhaps a secret weapon. With more relaxed guidelines for most biometrics, Penn’s tendency to make a preferred or preferred plus offer appears higher than its Mutual competitors. All in all, Penn Mutual has developed a really solid whole life contract.