Whole Life Insurance Distributions, the “Whole” Story

Life insurance agents love to fight over meaningless figures in an attempt to inflate the importance or attractiveness of their products.  Truth is, current facts and figures aren't going to matter all that much.  I've mentioned before that design is super crucial, and I've also hinted at the notion that there are core attributes that make some products better than other.  There isn't really a blanket list of features regarding these attributes, so a little consulting with a knowledgeable agent is prudent.  To highlight my point, however, I'm going to dive into the topic of policy distributions.  This will become part of many posts discussing different features and why they matter.  Throughout all this, you'll begin to understand why it's difficult to recommend one carrier as better than all the others, as they can be varied in where they are strong (i.e. one size–or carrier–does not fit all).

Northwestern Mutual Is…

I'm sure we could have a field day asking people to fill in the blank.  The amusing words and phrases that come to mind is a little fun to ponder (at least for insurance agents).  I bring up the old Quiet Company, because it's career agents are famous for declaring its products the best at everything.  They also like to inform their prospective clients (identified as anyone who is unfortunate enough to sit within ear shot of them) that their Whole Life product is the best one on the market–unconditionally.  Most people possess the mental powers to see through this embellishment, but since NML has developed such a crazy reputation, I'll put them in the cross-hairs of making an example out of them to illustrate my point.

There's seems to be a ubiquitous page in the old NML training manual that instructs all agents to quote a “study” conducted by an independent third party that declares NML to be the best.  If you push hard enough, some NML agents might actually produce the “study” for your review.  The “Study” (if you're getting sick of that word, no worries I am, too) is actually the results of customizable reports an agent can create with Blease Research's Full-Disclosure–a comprehensive repository of facts and figures on a wide array of life insurance products.   The specific report in question is a historical comparison of “actual” policy performance, which shows that for the past 20 years NML–SBLI–have been about tied for higher IRR performance on a $250,000 death benefit whole life product issued at preferred best to a 45 year old male.  Impressive, let's all run out and buy a policy from NML, right?  Not so fast…

Ignoring the obvious fact that this only proves 45 year old males in good enough health to receive a preferred best policy from NML (or SBLI, they get ignored a lot, poor little company from Massachusetts) and wanting $250,000 in coverage on a base whole life policy would have ended up with the highest IRR on cash value 20 years ago if they had opted for the Quiet Company (or the No Nonsense Company), let's spend some time wading through whether or not we really care that this fact even exists in the first place.

Life Insurance is a Terrible Investment Says the…

Person who doesn't realize fixed insurance products aren't investments.  Anyone who says something like “you could use your whole life policy like an investment…” is someone you should run far and fast away from.  Why?  Because FINRA and the SEC regulate what can be considered “investments” and fixed insurance products aren't on that list.  Doesn't mean they can't appreciate in value, doesn't mean you can't make money off them, but it means they are not investments, and should not be treated as such.  Savings plan, now there's a different story.

Nonetheless, the investment types among us who declare whole life a terrible…whatever…tend to declare it so categorically.  When pressed, you'll get most of them to admit they make this proclamation based on rate of return cash surrender value wise vs. hypothetical models for investment strategies (based on assumed portfolio returns that are plucked from the air).  So, whole life insurance is a terrible…whatever…based on their set of rules.  Are those rules necessarily important?  NML likes to fight the fight and say yes, but this willingness to fight originates from a laziness to accept their model because taking the time to convince you that there's a more important ball to keep your eye on (these guys recommend American Funds by default, so there's your first sign they may not dedicated to anything more than the same cookie cutter approach the investment salesmen prescribe to, only whole life insurance is their primary weapon of choice, even a good product poorly executed can be a huge mistake).

So, the terrible advice championed by investment salesmen is also pushed by the NML agents, the same “I can get you a better rate of return” business by which they live (and die).

How can Rate of Return not matter?

It's not that it doesn't matter, it's more that it's not the most important consideration.  There are plenty of more important considerations when it comes to an overall financial plan.  Rate of return ranks lowly among these considerations because it's a variable over which you have practically no control.  There are a lot of variables to consider, but today we're going to focus on distribution.

So NML makes a big deal out of their internal rate of return on cash value for their whole life policies, and they lean on historical data put together by Blease to convince you (and maybe even themselves) that what they've got is undeniably the best.  However, there's a “study” out there that you won't see NML agents touting and disseminating.

This report, also from Blease, compares the distributions from various policies given a constant premium ($10,000) paid for 25 years and then distributions for 20 years immediately following.  Here are the results:

Distribution Comparison Whole Life Blease

Now, it's important to note that these figures are based on projected results, so the numbers in absolute terms are not necessarily something we can rely on.  But, there is something much more important we can glean from this data.  The important take away is the ability to access cash in the policy by looking at distributions relative to cash value.  The winners here are Penn Mutual, Ohio National, and Security Mutual.  Northwestern fairs pretty badly actually.  It's certainly no winner, not in the sense it would like to convey in the IRR comparison.  For every dollar in cash surrender value in the Penn, ONL, or Security Mutual policies you can access roughly 7.5+ cents.  NML on the other hand only allows about 5.7 cents.  Based on what we know about design and Paid-up Additions (even more coming in the very near future) this is much more easily controlled than one might think.

In fact, as much as this report helps us analyze policies in a different–and I'd say more useful to the end user–way, it still misses the mark on how a policy should be properly designed when retirement planning is the key goal.  That's a huge digression that I'm not about to make.  We will, however, entertain this subject in the very near future.

The big take-away today is distribution matters.  The mechanics of a particular policy can make it either really good at distributing the cash inside it like what can be found at Penn Mutual, Ohio National, or Security Mutual (a tiny insurance company located in Binghamton, NY once known for its supremacy in the 412i market) or bad like NML, Thrivent, and Country Financial (a company who is on top of the IRR comparison, but certainly not winning on the relative distribution side).  Don't be fooled by the who has more money in the policy game, it's a slight of hand trick used to pull your attention away from the the topic that really matters.  So, if you're wading through ledgers from illustrations handed to you from an insurance agent.  Ask for distribution figures, and compare those against other policies, not the cash value in certain in any given year.

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