#186 | The Best Whole Life Product is…

Evaluating Whole Life is devilishly tricky. Dividend Scale Interest Rates are not necessarily comparable across carriers. Policy charges are not explicitly disclosed. Each policy has a different premium to death benefit ratio. Policy loan rates and provisions vary between companies. And then layer on that the prodigious amount of propaganda produced by the Big 4 mutual companies about their bulletproof financials, sterling dividend performance and illustrated performance in their chosen niches. It’s tough to figure out what’s real – which is precisely why agents constantly ask me which company has the “best” product. Bad news, folks. There’s no such thing.

In pricing Whole Life, actuaries are afforded real opportunities to creatively design a product to achieve certain outcomes. Dividend slopes vary greatly between companies and products, as do guaranteed premium levels, policy loan provisions, blending options, enhanced dividend riders, premium durations, non-forfeiture pricing (for RPU) and a host of other factors. These design decisions rise to the surface in the form of illustrated performance, elevating certain products over others in certain situations. As with other product lines, illustrated performance undeniably drives sales, even for mutual companies with largely captive audiences. But should it?

The core tenant of being a mutual company is the concept of mutuality – the idea that policyholders contribute premiums and take their fare share of the dividend. Strict and perfect mutuality assigns dividends in exact proportion to contribution. The concept of mutuality ensures that mutual insurers don’t reap profits from one group of participating policyholders to pay to another group of participating policyholders. The very definition of participation means that the policyholder receives their fair share of the dividend and mutuality is the principle that ensures fairness. Despite real differences in illustrated performance due to design decisions, the reality is that every single participating policyholder gets what is fair based on their contribution.

Understanding mutuality changed my mind about Whole Life. Mutuality is an insurance policy on the integrity of the life insurer. But it’s more than that. Mutuality binds the success of the life insurer to the performance of the policy – to the performance of every participating policy. And if you really take that to the end of what it means, you come up with the inescapable conclusion that Whole Life illustrations are a terrible way of judging a Whole Life product. Why? Because mutuality means that all of the products are equally fair in their payouts to policyholders, regardless of illustrated performance differences. Every policyholder will get their fair share. And that leads us to the all-important question: fair share of what, exactly?

The true differences between Whole Life products are not found in illustrated performance, which will inevitably come out in the wash, but instead in the long-term surplus of the Whole Life insurer itself. Every major mutual company has a slightly different strategy for producing surplus. Northwestern Mutual is a pure-bred Whole Life company where the long-term surplus is predicated on strong investment earnings, rigorous expense management and judicious underwriting. All three of those things, all else being equal, should give Northwestern Mutual an edge in actually producing surplus for participating policyholders. MassMutual, by contrast, is less concerned about milking yield out of its general account portfolio and is far more interested in selectively and opportunistically buying or building businesses that throw off prodigious earnings to fuel its surplus. The case study, of course, is Oppenheimer Funds, but that’s hardly the only business operated by MassMutual that kicks earnings up to the mothership. New York Life is a hybrid – it runs a massive participating Whole Life block with an even more massive, top-3 fixed annuity business throwing earnings upstream to NYLIC’s participating policyholders. Guardian is a purist like Northwestern Mutual at heart, but dabbles (sometimes successfully) in ancillary, non-participating business lines, giving it a well-diversified if subdued earnings base.

Which strategy is a winner – the purist, the opportunist, the specialist or the diversifier? One could make the case for each. You could say that Northwestern’s surplus will be the most stable because it is tied to more controllable and predictable metrics, things that Northwestern has time and time again proven to adroitly manage. One could argue that MassMutual has a proven track-record of making solid investments in businesses and its policyholders will continue to reap those rewards. One could make the case that New York Life gets all the benefits of prudent asset management through both its Whole Life and annuity arms, without putting risky liabilities on the books for either. And one could also say that Guardian’s diversified book is the best of all words, a stable, strong but consistent foundation for future surplus.

Buying a Whole Life policy means buying a little slice of the life insurer. That’s what mutuality ensures – and mutuality overrides any illustrated differences. In the wash, the only thing that counts is the size of the fair share to which the policyholder is entitled. With Whole Life, you have to believe in the company in order to believe in the product. You cannot separate the product from the company or vice versa. My answer to the question of which company has the “best” Whole Life product, then, is that the best Whole Life product is the one sold by the company you believe in. That’s your choice, of course. Top agents at each of the big mutual companies know their leadership, they know the stories, they know the skeletons and they know the strengths. They’ve come to terms with their company and, fundamentally, believe in it. And that’s a great thing – maybe even a beautiful thing, maybe even something to be celebrated.

But it also comes with a warning. If you’re choosing to sell a particular Whole Life product simply because it illustrates better, you’re in danger of being fooled. Creative actuaries know you have a trigger inside of your brain that lights up when you see a product clearly “win” in a certain scenario. They can easily design a product to pound that trigger like a mouse in a box asking for cheese. The responsibility of every agent selling Whole Life is to know the company writing the policy. I’m not talking about the name, I’m talking about really knowing what the company is all about. Does that company write risky business in other product lines that could blow the whole thing up? Does that company fabricate capital out of thin air by shunting risky business off to a captive reinsurer? Does that company have a long track-record of putting policyholders first? Is that company a real mutual company, a mutual holding company, a family owned enterprise or a public company? Is Whole Life a core business or an ancillary business? The answers to these questions really matter. They will really, materially affect outcomes for policyholders. Why? Because with Whole Life, you can’t separate the product from the company. End of story.

The best whole life policy is the one sold by the company you believe in. And if you haven’t done the legwork to build your belief in a life insurer, then don’t sell its participating products – regardless of what the illustration says.