Whole Life Insurance Pros and Cons

First, I feel the need to provide context for this post. 99% of our clients want to use cash value life insurance as an asset class. Which means people need to distinguish whole life insurance from indexed universal life insurance.

Yes, there are other products.

But none that we feel are worthy of consideration.

Which is better?

What are the pros and cons of each? Why would a person use one versus the other?

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2015 Operational Cash Flow Growth for Whole Life Focused Life Insurers

We’ve reported on operational cash flow among life insurers in the past and note that we hold this metric in high regard for a multitude of reasons.

Our philosophy is that operational cash flow shows us true profitability of a life insurance company, especially among whole life focused insurers. Why is that? Well, it's primarily because life insurers have a unique income reducing option at their disposal with policyholder dividends.

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Whole Life Insurance Five Year Investment Income Trend

Investment income is a huge profit driver for life insurance companies.

We've spent a lot of time analyzing and reporting on overall investment yield trends for life insurance companies, but that analysis only compares the raw yield insurers achieve on their managed asset pool.  It's possible that a declining yield simple indicates a de-risking strategy.

Investment income is not necessarily declining and the insurer is under no real financial trouble.  In fact, we've made this argument several times when discussing these trends and others.

So if we instead look at

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The Power of Whole Life Insurance in a Down Market

 

A few weeks ago a client of ours (we’ll call him Ted to protect his identity) reached out to us looking to take a policy loan from a whole life policy he owns.

A unique and, arguable rare, opportunity arrived on his door step (literally) and he needed cash. The interesting part of this story, though, is not that whole life cash values were available to him so that he could seize the opportunity but rather that he had plenty of other money he could have used instead.

There was just one problem,

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2015 Whole Life Focused Company Cash Flow Trend Analysis

Operating cash flow is the cash generated by an insurance company prior to the inclusion of investment income generated by managed assets. Under insurance statutory accounting rules, this is profits generated after deducting operating expenses. Insurers that have issued participating policies can cover planned dividend payments with operating cash and/or investment income.

We look at operating cash as a secondary indicator of insurer operating health. I say secondary because it commonly affects policy performance far less significantly than investment performance on managed assets.

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Historical Whole Life Insurance Dividend Changes: 2015 Edition

Historical Whole Life Insurance Dividend Changes

Whole life insurance dividend changes often happen once per year and we generally get excited near the end of the year when most companies announce these changes. We’ve been tracking and announcing changes when they become available for the past several years and will continue to do so in the future.

The anticipation for the announcement of the following year’s dividend focuses mostly around evaluating how well an insurance company is doing—especially with its block of participating life insurance—and how these results affect the dividend interest rate. We don’t get a lot of under-the-hood information about whole life insurance, so any metric we can use to look at how things are going is always appreciated, and dividend interest rates are one of those metrics.

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Breaking News: New York Life Announces 2014 Dividend Rate

MetLife Announces 2014 Dividend Rates

New York Life has announced its plans to pay $1.43 billion in dividends to its participating policy holders. This dividend payout is an increase of $109 million over last year.

In a very quiet announcement, the company reported on a number of positive sales results of various products–including 10% sales growth of its whole life product through Q3.

What does this mean for the dividend interest rate?

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Breaking News: Ohio National Announces 2014 Dividend

MetLife Announces 2014 Dividend Rates

Ohio National Life has announced the dividend interest rate for 2014. In an announcement from President and CEO Gary “Doc” Huffman, ONL noted its great expense management, strong portfolio performance, and very favorable mortality experience. No word on what the total dividend payout is for the entire company (not that it matters much to any single individual).
So what’s the new rate?

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Breaking News: Northwestern Mutual Announces 2014 Dividend

MetLife Announces 2014 Dividend Rates

Northwestern Mutual has announced that it plans to pay $5.2 billion in dividends to participating policy holders next year. This represents an increase of the total payout over last year of roughly $200 million. 90% of this payout will go to whole life policy holders.

But as we know the bigger consideration is what does this mean for the dividend interest rate?

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