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In Reply to: Re: Re: Re: nml in trouble posted by Rock on August 20, 2001 at 14:30:40:
: : 8.8% is a dividend crediting rate it is not INTEREST. All life insurance companies have a proprietary formula they use in computing dividends. Dividends are to life insurance what special sauce is to hamburgers -- it's 1000 island dressing and katsuo and mayo in differeing amounts -- taste similar but it's not the same. In a life insurance policy dividends are comprised of net return on equity in the general account of the company ( responsible company will target a 6% to 7% ROE as that is conservative and SAFE and easily maintained by investing in bonds and real estate and private placements ), the other two factors are mortality savings ( how many people didnt die versus the amount we said would -- life insurance companies OVERESTIMATE mortality in whole life so they can GUARANTEE the CV and the DB -- the excess goes to reserves then policyholders ), and the last component of the dividend is savings from the operations of the company -- ie more streamlined and cost effective operations. All life insurance companies compute this differently -- it is their competitive advantage. Lastly dividends are a function of total face amount in force -- proportionately the more death benefit a company has in force the greater the dividends. Prudential is the larget life insurance companny in America -- they distributed $20,000,000,000 in dividends last year. They have the largest block of business. NML is growing their book -- no question but they no longer submit their historicals to AM Best one can only conclude that their costs of doing business, their mortality margins, and or their net ROE are getting worse -- not bad -- but not what they have historically been able to do.
: : You cannot show on an illustration a long term 8% ROR to a client -- because it might not happen, and it is misleading. It might be better -- it might not.
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: TVO, : Thank you for your informative posts. Most of what I have read about Northwestern Mutual Life (NML) is positive, particularly their past history of meeting policy illustration projections. It is a bit worrisome if they have chosen to discontinue reporting results to AM Best. OTOH, doesn't an insurance company have to pay AM Best to be rated? Maybe they just decided this was an unjustified expense, since most of their policyholders would not have access to the AM Best data anyway. If I were running a life insurance company, I'd certainly wonder about the ethicality of AM Best charging both the insurance companies and those who wish to access their acquired data. : I am not in the insurance industry, but just a self-eductated policyholder with a New York Life (NYL) Whole Life policy. You may know I am trying to learn as much as possible about Whole Life to increase the accuracy and info available at my Visible Policy site (below). : NYL and NWM differ in their Whole Life marketing. NWM openly talks about a dividend rate of 8%, but NYL avoids even associating the term "rate" with policy earnings. They refer to dividends as "your share of the divisible surplus". I have back-calculated actual dividend rate, and NYL has been paying just over a 4% dividend rate with basis being accumalated cash value. : The policy earns more than that. Each year guaranteed cash value goes up, and my policy is old enough where this increase is greater than the premium payments. Also, they refund $160 of my premium at the end of the year, crediting this with dividends. (This is probably a consequence of the "overestimate the mortality rate" you mention.) And finally, there is, a "linear increase" in value of the cash value associated with my paid up additional insurance. : Perhaps all this adds up to 8%, but with the inherent complexity in sources of cash value gain, I can understand NYL's reluctance to associate a rate. Some components are guaranteed, some are not. I'm almost sorry I don't also have a NWM policy so I could figure out how they do associate a rate with this mess. : If you have any insight into policy earnings which I haven't already figured out, I would be very appreciative of any info you could provide. : -- Rich |
if memory serves NYL's dividend crediting rate is 7.2%. NYL historically is not a company that sells thier dividend performance because it is something that they as a company have chosen not to do. Not because they are bad dividends but because they want to sell on other factors -- strength of company, versatility of insurance product, application in the overall financial picture et. al... .
When you say you have back calculated the dividends you have done nothing of the sort -- what you have done is discovered the IRR of the policy -- the cash on cash return. When calculating dividends you must include the guaranteed cash, the paid up addtions cash value and the total death benefit. The 4% number you derived is nothing more than the guaranteed rate of interest on the policy.
This might make it easier for you -- all whole life insurance is is discounted dollars purchased today for delivery in the future -- that's it nothing more nothing less. Substatively there is no difference between the cash surrender value of a life insurance policy ( WL -- not VUL )and the equity in a piece of real estate. CV is not a side account, or a pool where $$ is accumulated, it is the policyholders current equity in the company as a function of face amount. When you buy whole life insurance you are buying discounted dollars for delivery in the future -- its up to the client to decide if it is indeed valuable to have those dollars in the future.