Northwestern Mutual...

I may be a bit late with this post but I wanted to weigh in and voice my opinion. I have a fair amount of knowledge with life insurance planning as well as comprehensive investment strategies. I think both NML Agent and Wolfpac make solid arguments for both sides. This debate could go on forever because there is no REAL answer. I think few important things to note are;

1. Rate of return has much less of an impact on portfolios than actually being a disciplined saver does. Regardless of where you save, whether its in the market or life insurance or both, the main element in creating wealth is that you are saving, consistently.

2. Permanent life insurance isn't supposed to beat the market. It is designed to outpace other fixed income assets in a tax favorable environment. Some companies do a much better job at this than others. The majority of the products in the industry are garbage but a few are able to do this on a consistent basis.

3. Permanent life insurance isn't designed to be someones only form of savings. People that use this as a tool should also be investing in equities. Permanent life insurance, no matter what firm, isn't the be all, end all financial product, but it certainly does have a place in many consumers portfolios'. Typically 5% of gross income is an adequate amount. The other 10-15% should be allocated towards other equity based investments. A la in a 401(k), Roth, and/or brokerage account. (Obviously the actual percentage is dictated by the individuals age and risk tolerance.)

4. When doing life insurance planning, the biggest issue isn't what type, it's how much. The way to own it should be ancillary to how much of it you own. Typically between 10-15 times income is enough to duplicate an income stream for a surviving spouse until retirement. For stay at home spouses 500k-750k is enough to pay for the cost of care for children.


I hope this helps someone out there and doesn't spark another heated debate, I'm not much for arguing on forums.

 

Wrong board for that attitude!!!

Good points overall. Totally agree with you on the how much part. America is vastly under-insured in both life and disability as well as long-term care.

I just checked Consumer Reports to see if they had changed their recomendations around Life Insurance (since they are about as unbiased as it comes to this stuff) and they are still advising to avoid Whole Life and buy Term except in rare cases which I think is pretty much what most of us have said. The numbers though are absolutely wrong. 70-75% of life insurance policies sold today should be Term instead of Whole Life but that's not the case.

BTW, and I add this just for giggles, I had an in-law ask me about a Whole Life policy that he has had for 44 years just this weekend so we sat down and looked at it and the cash value is still not ahead of the premiums he has paid and he was rightly ticked off when he found out that the cash value that has almost worked hard enough to jump above premiums paid will be kept by the company if he dies. It is a participating policy so there are dividends and if you add those in, his ROR for 44 years is roughly 1.92%. Oh yeah, this isn't from a garbage company either. It is from one of the top 2 mutual companies though I will be nice and not mention which one.

But, like you said, this could go on forever. I'm trying to do my part but they train salesmen well.

 

Response to Thread

I can't believe I just took the entire time to read this thread. I had this debate internally and with other associates and partners a few years back.

In 2003, I bough a permanent whole life contract from a mutual company. The salesman that sold me the policy told me that there are only 3 companies to buy a policy from Northwestern Mutual, Mass Mutual, and New York Life(nml agent it must be something they teach you salesman). Apparently those are the only true mutual companies. Meaning the policyholders receive the profits and there are no stockholders in the company. To my knowledge a mutual company and a participating company are not the same (i.e. a mutual company is a participating company, but a participating company might not be a mutual company in the full definition). Someone correct me if this is wrong.

At the time I had little concern with death benefit. My policy has 1/3 of its premiums that aren't contributed to insurance cost. They go straight to cash and apparently avoid commissions(based on the illustrations that seems accurate). My agent told me that is the most efficient way to structure the policy. I do have to be aware of it becoming a modified endowment contract in year 35(as a tax attorney; I am ok with this, and understand the concepts). My agent brings me an enforce document each year that shows the current dividend scale and the effect it will have on my cash value and insurance coverage.

We just had that review and the dividend scale decreased but still seems strong. Stronger than most of my investments look. This year was my first year that my cash has gone up by an amount greater than my premium contribution. If I give up the policy now, I will have 5 grand less than I contributed. Would it be safe to say it cost me 5 grand to have 500k for the rest of my life? Well maybe even more since the death benefit is growing. That seems like a sound statement assuming the dividend stays constant. I am ok with that assumption at this point, since I think the dividend could go up just as easy as it can go down(maybe i'm crazy).

In regards to the article that shows illustrated return versus actual. I do find that a bit alarming but based on my knowledge of fixed investment returns during that time period it doesn't surprise me. Per my request my agent ran me a rate of return based on my average tax bracket including state tax (~30%) and cash on cash return (0%). Over a 20 year period my cash on cash return is comparable but slightly better than muni-bonds historical return. However, a significant portion of my open investment account is in muni bonds and tax managed mutual funds as well as cash. From what I gather the article illustrating the difference in illustrated vs. actual is the cash on cash return (if that is the case I wouldn't be frustrated with that). NML agent mentioned the standard deviation, and I put a request into my agent to see something like that.

I remember when I first started here I had these guys calling me all the time trying to sell me stuff. I turned most of them down and we talked all would talk about these companies and there insurance and investments. I even turned down some that represented companies that are gone or in complete disarray. It was pure luck that I avoided them. Then a college law buddy called me and agreed to meet with him. He was an insurance agent. I never understood why someone with the J.D. would be a insurance salesmen, but out of respect I met with him. I was very skeptical until I went to the most respected estate attorney at our firm and I have never seen someone be so crazy in love with something (for the record our firm doesn't sell insurance products). Now against wolfpacs advice I decided to buy the policy described above. For the record I max out my 401(k) and save nearly $2500 a month. Only $540 of it goes to my insurance premium. I am not saying this to brag...I am not from a wealthy family so I am well aware that is some families take home income on a monthly basis. I guess there are some advantages to being single.

For those using this thread for advice...I am not advocating this as something for you to purchase. I was sharing my story with the product.

For those debating on this thread (or should I say the two of you)...I am not saying one of you are wrong or right. Simply, I decided to buy the product. There may be a better spot for my money, but I was willing to give a person I trusted and a company I trusted a shot.

If there is anything I have learned this year it is this: Slow and steady gains are useful in any savings and investment strategy. An investment portfolio that falls 50% in value needs to recover by 100% to get back to EVEN. So making sure you have some "safe" dollars set aside in whatever vehicle you feel is appropriate to your situation is an excellent idea.

 

uw, no offense and I am not referring to you specifically, but the old saying is "A fool and his money....". Unbiased research showed they lie on the projected ROR (based on what I am seeing in looking at these with people, I would even question the ROR gap they showed as I am seeing it vastly differ from what that article had) and Consumer Reports gave their unbiased opinion which is to stay away from them except in rare cases and maybe that is your situation. Like I said, they are trained very well. It's admirable really. Course, one consumer advocates is now calling this industry the "payday lender of the middle class". To each his own though and if you are happy, that's cool. No money out of my pocket. I'm just simply pointing out what unbiased research/opinion says versus the trained salesmen hawking a product that makes them a lot of commission.

 

fool and their money...

Ok I will pretend that was not an insult directed toward me. LOL. You can’t just say, “I am not referring to you specifically, but the old saying ins…”. You were referring to me and that’s fine.

My advice for you is to make certain you understand what you read. The article you posted compares illustrated vs. actual returns, which was quoted from the National Underwriter. I suggest you read the actual article like I just did. Your posted article is comparing something completely different (whole life vs EIUL opposed to actual vs illustrated). In fact, I think this author is tried to say that whole life contracts will always produce 2-3% under their illustrated view. This is a faulty assumption. National Underwriter published these numbers and they are accurate, I am not debating this. But this diagram represents that 20 year period. The illustrated rates were higher because the fixed investments at the time of illustration were much higher (double from their average over the same time period). Therefore the dividend was higher and the illustration turned out to be higher. This would be a good time to mention my expertise is in tax law and not life insurance. However, I am very interested in the topic because I see policies on a daily basis. Fixed investments have a huge impact because whole life portfolios must have 80% of the portfolio in fixed investments.

I also suggest you be more careful with the wording of your blog entries. Accusing companies of lying is an overly bold statement. Maybe certain agents “lied” or certain clients didn’t ask questions. Illustrated returns on whole life contracts, according to the national underwriter, must be illustrated at the current company dividend scale. So I find it a hard to believe that these are represented as guaranteed ROR. My illustrations had two columns “guaranteed” and “current”. Whole life contracts have to be a minimum of 80% fixed investments. Variable contracts investments are picked by the individual “investor”. From my research there was little to suggest that variable contracts couldn’t represent whatever return they wanted. It is my personal opinion that these variable and universal contracts are more dangerous and are sold to fool people. In fact, if you are going to index your life insurance why don’t you just buy the index instead??

Now that I rambled about a bunch of nonsense, I guess I should get to my point. At this point I seriously doubt your creditability. I think I need to know more about your experiences helping people in this matter. What companies are screwing the people you work with? Do you work with people who are low-class, middle-class? Do you have any knowledge across companies? Do you know which companies are actually mutual companies? Who did you buy your “crappy” policy from?

I have trouble finding any value in your two main arguments against owning mutual, dividend paying whole life insurance. 1) The people who sell it are trained salesmen—big deal, I want my agent to be well trained and knowledgeable. My tip—ask questions and learn about the company. I recall I had to sign like 8 times just to apply, do a medical exam, and sign another time to accept the contract. I don’t care how smooth these guys are before go through with all that I made sure I did my due diligence 2) The illustrated ROR was greater than actual return—the Dow’s average annual return over a 20 year period is 4.54%. Less than what most people expected and those gains are taxed. Stocks are a fine investment and majority of my assets are in equities. However, do not under estimate the value low standard deviation and beta when investing. I find great value to an investment that will continually average 5.4% year after year as long as I keep it for 20 years. I think there is value to having the turtle (whole life insurance) as a meaningful part of my assets.

This post above is directed to wolfpac. I don’t think anyone should make a life insurance purchasing decision based on my posts. I do think anyone who is currently saving 25% of their gross income and wants to save another 5% in the non-qualified arena should look at whole life insurance from a true mutual company as an OPTION. If you are like me, non-qualified tax advantaged investments are at a minimum, so learning about all possibilities is a grand idea. It is my assumption based on this thread that the majority of people wolfpac works with at the church have household incomes of less then 100K. Not necessarily people with advanced decision making skills and in all honestly probably people that shouldn’t own whole life insurance.

 

uw,
I help people in my community and Church get their financial lives in order using the Dave Ramsey class. I've seen quite a few from the top companies that are awful (like I mentioned, 1.92% ROR for 44 years which is basically Social Security style returns). The one I had in particular was from Farm Bureau and it too was awful. I think I did mention above that NW Mutual is known for producing better returns than other but that's like being the best looking fat chick. Still sucks overall. Not to mention that I used to work in the Actuarial field so I statistically understand the numbers behind them and the tables they used to base those numbers.

Again, I merely point out that they are well-trained to push products that are good for them and their company. Consumer Reports doesn't push any products beyond their comparisons and they say to stay away from them except in special cases which I acknowledged above. That is about as unbiased as you can get,

BTW, when you tell someone you will deliver something and you don't, is that not a lie? Especially when they hawk it that it WILL deliver those results. You think they told the person in my family that it would deliver a 1.92% ROR over 44 years. Social Security performing LOLLER.

Those aren't the only main reasons for avoiding this garbage. The fact that you pay all these fees for a low-return product that if you die, they keep the freaking cash value is pay-day lending-esque. The way they hawk these things are awful. I had it hawked to me about 2 years ago as a way to save for college (and this was from a top ranked mutual company). That's just absurd. I save up money in a fee-heavy product at which I can borrow 90% of the low-return cash value at an interest rate higher than freaking student loans. That is how this stuff is sold even by the top mutual companies and it is a rip and garbage.

In the end, no skin off my back. I won't make money if someone buys this idiotic garbage or if they don't buy it. Just want to make sure people get both sides.

And oh yeah, it's a message board not a blog. Would have thought an attorney would be able to figure that out.....

Edit that I had one from Farm Bureau not State Farm. Same horrible results....

 

LOL at the newbies showing up on just this thread. Defend the Savior at all costs!!!!!!!!!!!!!!!

 

what is the farm bureau??

What is the farm bureau? State farm isn't a mutual(not positive though). Can you post this consumer report? I couldn't find it. Thanks.

People use life insurance to save for college?? I hope it would be your kids’ college that is 18 years away. I have seen life insurance policies on kids as gifts. Not for college savings though. Definitely not efficient!!!! The only way that would work is with significant over funding. As an actuary you should be familiar with the over funding concept. Let me know if you need clarification. I'm not being cocky; seriously let me know. Some (maybe most) agents won't show over funding because they give up significant comp.

We are getting into topics I actually see on a daily basis.....You are dead wrong about the insurance company taking the cash value when a person dies. Most insurance contracts are set to endow at age 100. Meaning the death benefit and cash are equal. Take someone that has a policy with a 1M dollar death benefit and 600K of cash 40 years into the contract. If they take 500k of cash in year 41 and die in year 42, their beneficiaries receive a death benefit tax free cash payout of 500k. If the same contract was never borrowed from, the death benefit payout would be 1M dollars. I am very familiar with it because I still gopher around on these estate and tax cases.

Now in the sixth year of my policy, I just hit an important year. For the first year my cash value will increase by more than the premium dollars I put in. If I surrender the policy now, I will be out 5,000 bucks. So, $5000 is my cost to have this insurance for life. I would argue it would be more costly to hold term for 40 years even at healthy rates. Plus a death benefit may never be paid.

Level 20; age 25; 500k
500 bucks a year X 20 years = $10000

Level 20; age 45; 500k
1000 bucks a year X 20 years =$20000

Age 65 total cost = $30,000 Total insurance at age 66= 0

My break even point is year ten--meaning if I surrender the policy in year ten I get every dollar I put in--- back. If I keep this policy for life the death benefit will be 2 maybe 3 times greater at my time of death. Meaning when I go, my significant other will get an influx of tax free dollars to continue living off. A free pass to agressively spend down my assets. I will also be able to maximize my pension. It's not for everyone but this was definitely the right play for me.

 

Love the google ad for NY Life!

 

Oh Lord, where to start with the absurdity of uw's last post. First off uw, Farm Bureau is a company named "North Carolina Farm Bureau Mutual Insurance Company". Here is their website:

http://www.ncfbins.com/Default.htm

Seriously, you are about dense if you can't use a basic search function on a website. From Consumer Reports webpage, here is what they say about the ripoff known as Whole Life (and you don't need a subscription to see this part actually which either means uw is a complete liar and didn't search for it or he is about the dumbest internet user since the invention of the internet):

http://www.consumerreports.org/cro/...resultIndex=1&searchTerm=Whole Life Insurance

"Cash-value insurance can provide both estate-planning and tax advantages for well-to-do people over 60. But for 20- to 50-year-olds, Consumer Reports has long recommended a term-life policy as the simplest, least-expensive way to insure against an untimely death.

“Every time I look at the rate of return of cash-value vs. term insurance, I’m not impressed,” says Glenn S. Daily, a fee-only life-insurance adviser in New York. He says insurers often overstate the rates of return promised on whole life."

Hmmmmm, what does that sound like. Oh yeah, what I have been saying all along and what unbiased research has shown!!!

Tell ya what, I will post a link to Dave Ramsey's page where he discusses Whole Life and quote Clark Howard. Two of the leading Consumer Advocates in America (ie, they aren't getting comissions like the snakeoil insurance salesmen).

http://www.daveramsey.com/the_truth_about/life_insurance_3481.html.cfm

From the link:

"After that, the return will average 2.6% per year for whole life, 4.2% for universal life, and 7.4% for the new-and-improved variable life policy that includes mutual funds, according to Consumer Federation of America, Kiplinger's Personal Finance, and Fortune magazines."

"Worse yet, with whole life and universal life, the savings you finally build up after being ripped off for years don't go to your family upon your death. The only benefit paid to your family is the face value of the policy, the $125,000 in our example. "

If Dave Ramsey is not telling the truth, you can sue to stop him as that would be lying about a financial product that these companies are selling. But, he is saying this in front of 4 million people daily on his radio show as well as his FoxBusiness TV show nightly (at 8 PM). And guess what, no lawsuit from any of these rip-off mutual companies because it is the truth and this is what I have seen with the 44 year old Whole Life policy I mentioned in another post. First of all, the cash value is still NOT higher than the premiums paid after 44 freaking years and the only reason the real Rate of Return is higher than 0 is that it is a Participating Whole Life policy meaning it has dividends (even those are at a crummy dividend rate when we dove into it) which gives it a REAL ROR of 1.92% when we did the calculations. I then told my family member that if he died, he would lose the cash value and he didn't believe me. Called the agent and confronted him and the agent had to come clean and told him the truth which is exactly what I told him. He was outraged because that is not what he understood when he bought it and he canceled that garbage (poster lclefty04 can absolutely confirm this story and quite a few posters know my relationship with lclefty04 - he is my brother if you don't know it). Oh yeah, this was a policy with one of uw's precious mutual companies: New York Life.

Here is what Clark Howard has on his website in his Life Insurance section: "So, this being “Life Insurance Awareness Month,” Clark feels compelled to remind you to buy life insurance. What kind of insurance should you buy? Well, you don’t want “permanent insurance” and that is what the salespeople will try and sell you. The three kinds you want to avoid are whole life, variable life and universal life. You want to buy the kind of insurance that is not considered permanent."

As I said, it is salespeople hawking this trash. They are the 'pay-day lenders of the middle class'.

So, believe the noobs who show up just for this thread to try to protect the 'Great Beast' or believe what Consumer Advocates, unbiased research, and unbiased opinions say.