Next up in our series of reviewing real-life results from whole life insurance policies, we look this week at Northwestern Mutual. Like other policies reviewed, we took data from a Northwestern Mutual whole life policy purchased around 10 years ago. We have the original illustration and used that to compare against current policy values.
We also used this data to look at the dividends currently payable to the Northwesern policyholder compared to originally projected dividends.
Northwestern Mutual Whole Life Policy Actual Cash Value Performance
We're looking at an NML whole life policy that used all the critical elements of a policy designed to optimize cash value growth. It's blended and uses the paid-up additions rider. We did not sell this policy and we cannot ensure that this design was in fact the most optimal approach for maximized cash value using Northwestern's design parameters. It is, however, an Adjustable Comp Life product, which was their star produce for overfunded cash value-focused whole life purchases until its retirement during the big CSO change effective January 1, 2020.
We used the internal rate of return (IRR) to evaluate how this policy performed compared to its original projections. Here's what we learned:
Originally, the policy projected a -1.05% annualized rate of return at this point in the policy. This means the policy owner anticipated a slightly negative rate of return up to this point. The dividend rate at Northwestern declined considerably since the original policy purchase. The real IRR achieved on this policy from inception is -4.45%.
Actual Historical Dividends Paid By Northwestern
While I don't have a detailed breakdown of each annual dividend payment from the policy outset, I can see the current dividend paid compared to the projected payable dividend from the original illustration. They are not surprisingly different.
The current dividend paid is 10% lower than the originally projected dividend payable at this point.
We can see that this lower dividend certainly drives down cash value performance from what the policyholder originally anticipated. It's also worth noting that while the change in dividends isn't as substantial as we saw in reviewing other companies, the change in cash value IRR is slightly more pronounced than in the case of some of the other comparisons. This point supports our long-standing claim that whole life insurance is a broad name used for a type of life insurance that can vary considerably from company to company when it comes to specific functionality.
Reasons The Policy Performed As It Did
For other policies we reviewed, I noted that the use of paid-up additions places less significance on the dividend payment for the development of cash value. This is especially true for the first several years of a whole life policy's existence. The guaranteed interest paid on cash value, which applies to cash value created by PUA's, drives a considerable amount of policy growth during this time. So the change in cash value growth due to the dividend changes is less when looking at the overall performance of the policy. Northwestern has always been a little unique in this regard. Even when their whole life policy doesn't make use of paid-up additions, they tended to project a much higher dividend payment to the policyholder than other life insurers. Some have suggested to me this is a result of their often higher premium for the same level of death benefit–in other words, there is a pseudo PUA baked into their base whole life premium. While I cannot confirm this, the idea that it doesn't actually cost Northwestern any more to offer $1 million of death benefit to the same individual than it does any of the other companies we reviewed is certainly true. So it makes at least intuitive sense that NML would have the extra funds to pay a dividend when other insurers wouldn't because Northwestern demands more money for the same death benefit in many cases.
Still, it's reasonable to believe that had this whole life policy used a more traditional design and approach to whole life insurance, the change in IRR would likely be significantly more.
The Timing Of Dividend Changes Matters
While this Northwestern Mutual whole life policy underperformed its original projections, the dividend performance moving forward could lead to a wildly different story over the next 10 years.
If the dividend remains mostly the same, then the spread between actual and projected values will grow. This is simply the mathematical reality of the difference between the initial accumulation assumption and current realities. If, on the other hand, the dividend increases over this time, actual results will pull closer to projected values. What's easy to overlook in a life insurance ledger is the role the timing of dividend changes plays on cash value performance. When the policy has more cash value, changes in the dividend will be more impactful.
This knife cuts both ways, however. A whole life policy with a larger cash value balance will get a considerable boost when the dividend goes up, but it will also miss out on a lot of growth when the dividend goes down.
The Northwestern dividend did change substantially since policy inception, and this results in a policy with a lower than planned rate of return. There are about $22,500 fewer dollars in the policy than originally assumed.