#279 | MassMutual Whole Life 10 Pay

After watching a wave of updates to Universal Life products to illustrate the new Section 7702-2% rates, it was only a matter of time before one of the major Whole Life writers released an updated version. It also wasn’t hard to figure out that MassMutual would be likely first. They filed first, at least from what I saw, and they’re one of the most heavily accumulation-oriented Whole Life sellers in the industry. If any company has the most at stake in the new Section 7702 regime, it’s probably MassMutual.

The MassMutual Legacy 10 Pay of the mid-2010s was an absolute juggernaut in the industry, almost singlehandedly catapulting the company to the top of the stack for mutual life insurers in terms of new premium flow. It smashed its competitors on illustrated performance and MassMutual backed it up with a 7% DIR and a heavy dose of illustrated loan arbitrage. The only thing that illustrated better than a MassMutual Legacy 10 Pay was Indexed UL – and that’s saying quite a bit considering how aggressive Indexed UL illustrations were (and, unfortunately, still are).

But in the wake of rock-bottom interest rates from the early days of the COVID crisis, MassMutual made the prudent decision to step on the brakes last year. As I wrote about in #225 | Making Sense of MassMutual’s Whole Life Price Increase, Mass increased prices on its 10 Pay Whole Life product by roughly 10% as a way to de-risk the product against the specter of long-term ultra-low rates. To offset the price increase, MassMutual amplified the dividend payout in years 11-25 in order to bring non-guaranteed performance back in line with the 10 Pay product prior to the reprice. That’s a bit of a challenge to sell, even though it made sense for MassMutual (and, therefore, ultimately its policyholders), but the real issue was that the price increase put the 10 Pay firmly in MEC territory. The product went from being boiling hot to ice cold basically overnight and the 12 Pay became the default accumulation-oriented for folks selling MassMutual products.

The new Whole Life 10 Pay – yes, that’s a name change from Whole Life Legacy 10 Pay, or “Leg 10” – is a return to form for MassMutual. The product takes full advantage of the new Section 7702 minimum rate by setting the guaranteed interest rate at 2%. The price of the product, predictably, has increased dramatically. For some perspective, take a look at the price of various MassMutual 10 Pay WL variants stretching back to 2015 for the same $47,750 annual premium on a 45 year old Select Preferred male:

ProductWL Legacy 10 2015WL Legacy 10 2018WL Legacy 10 2020WL Legacy 10 2020 v2Whole Life 10 Pay
Death Benefit1,145,9091,000,0001,126,4451,024,019668,768

We’ve seen in previous articles that the pure change to the maximum non-MEC premium for this cell is about 45% and that holds up between the non-MEC WL Legacy 10 2020 before the reprice (v2) and the new Whole Life 10 Pay product, which has premiums that sit just below the maximum non-MEC premium limit. MassMutual is quite clearly trying to get as much juice as possible out of the product for accumulation purposes.

And on that score, it delivers. In the outgoing Legacy 10 Pay product, break-even between cash surrender value and cumulative premiums paid happens in the 12th year. In the new Whole Life 10 Pay, it happens in the 10th year. In the long-run, Whole Life 10 Pay picks up about 40bps in cash value IRR over Legacy 10 Pay. The reason is the same as discussed in previous analysis – there’s less initial death benefit and, even more importantly, there’s a tighter CVAT corridor for the life of the contract versus the old 7702-4% regime. Take a look at how the IRR gains for the new product play out over time:

Legacy 10 PayWL 10 PayIRR Gains
Year 10-4.47%-1.25%2.12%
Year 200.44%3.39%0.35%
Year 301.32%4.07%0.23%
Year 401.53%4.15%0.30%
Year 501.47%4.01%0.42%
Year 601.38%4.13%0.40%

For Universal Life, the story of performance increases due to the new 7702-2% regime was partly about lower death benefits but primarily about the fact that Target compensation was reduced along with the death benefits, essentially leading a result where the performance gains for Universal Life was being 90% paid for by reduced compensation. I wrote at the time that there would be changes to compensation for Whole Life but nothing quite so drastic.

From what I understand, there has actually been a significant change to compensation for the new product – in structure, not necessarily in amount. The crux of the problem with maintaining the previous compensation structure is that New York essentially calculates a maximum compensation amount by creating shadow maximum premiums for Whole Life products. The NY rules didn’t change with the change to Section 7702, so that means that short-pay products taking full advantage of the new 2% rate will run afoul of the New York limitations. The usual solution for products that bump into NY comp guidelines is to spread the compensation into renewals, which I understand MassMutual is doing.

More surprising is that they’ve also moved to a Target plus Excess model away from pure premium based compensation. That was something I hadn’t anticipated but, in understanding how the NY regulation works a bit better, I see why they feel like they have to do it. Using Target essentially allows them to float the commission to stay on the NY limits without having to worry about other pricing impacts across the product. It makes sense, but it’s going to be a very clunky transition for agents who have been used to getting paid on premium. And if MassMutual is doing it, then you can bet that most other carriers – at least, the ones writing business out of a 50-state insurer – are going to have to do the same thing.

So far, everything is more or less by the books. The 40bps increase in performance is in-line with previous analysis on both a sample Whole Life and real Universal Life chassis using CVAT. Compensation has to be adjusted but, as I suspected before, the total amount paid to agents in Whole Life is remaining largely the same.

But there’s a curveball in Whole Life 10 Pay and it comes in the form of illustrated loan performance which is, to put it mildly, a bit fantastical. Let’s take an example. Using the same scenario as above, the illustrated income from Whole Life 10 Pay using adjustable loans is $68,921. To put that into perspective, running that exact same scenario using PacLife PIA 6 at its maximum AG 49-A rate of 5.18% yields – wait for it – $68,635 in income. For the first time ever, Whole Life has achieved illustrated performance parity with a top-shelf, accumulation-oriented Indexed UL product written by a major seller of Indexed UL. Little wonder why many IUL writers are suddenly blanching at the possibility of Whole Life products illustrating similar performance as IUL with less crediting volatility, stronger guarantees and bulletproof financial ratings.

Indexed UL writers are also going to immediately cry foul on Whole Life 10 Pay – albeit, with no small bit of irony or hypocrisy. Whole Life 10 Pay takes illustrated loan arbitrage in Whole Life to an entirely new level that smells a lot like Indexed UL. The adjustable loan rate for the new product is 3.25% (with a minimum of 3%, one percentage point higher than the GMIR) and the DIR is 6.0%, implying that MassMutual is illustrating a gargantuan, Indexed UL-scented 2.75% in illustrated loan arbitrage.

However, as I’ve written before, that’s an overestimation of the actual illustrated loan arbitrage. You can calculate the actual DIR that is credited to policy values by looking at the performance of the contract after endowment when there are no policy charges dragging on performance and the year-over-year cash value is the pure credited DIR. In the case of Whole Life 10 Pay, that rate is about 5.4% and leaving the product with a still-massive 2.15% in illustrated loan arbitrage.

The net result is that Whole Life 10 Pay is an income stunner. Compared to the old product, income has increased by 23% from $55,869.  To give you another datapoint, the $68,921 income as a percentage of the year 20 cash value ($847,733) is a whopping 8.13%. Running Symetra Accumulator IUL 4.0 for the same scenario illustrates higher income but the same percentage withdrawal.

The sheer size of the illustrated arbitrage in Whole Life 10 Pay allows it to run much closer to the limit in terms of loan-to-value than its predecessor. Take a look at the net cash value of each policy over time:

Two things stand out. First, the final cash value after distributions is much, much lower on the new product than the old one. Why is that? Because the old product had a 5% loan rate and because the policy IRR was less than 5%, there needed to be a buffer of cash value that would eventually burn down to age 100. At that point, the policy endows, charges go to zero and the pure 5.4% crediting rate flows through to the cash-on-cash return, which means that the net cash value starts to grow because of a 0.4% illustrated arbitrage between the loan rate and the cash-on-cash return of the policy.

This leads us to the second observation, which is that the illustrated performance of the net cash value after the income ends is like a hockey stick. Again, why is that? Because the loan rate for the new product is a mere 3.25%, so the illustrated arbitrage is already at play even though policy charges are still being deducted – and it obviously only accelerates after age 100, which you can see in the graph when the net cash value line for the new product steepens at the same time that the net cash value begins to grow for the old product.

If you were to take the names off of the chart above, I would have told you that you were looking at a Whole Life policy and an Indexed UL. The shape of the net cash value over time for Whole Life 10 Pay is the classic shape of net cash value when using Indexed UL for illustrated income. The thinnest part of the policy in terms of net cash value is the last year (or, in some Indexed UL products, actually before the last year) of income and then the policy values explode off the page. But that chart isn’t comparing Whole Life to Indexed UL. It’s comparing two Whole Life products written by the same company – one under the old 7702-4% rates and one under the new 7702-2% rates. These are strange times.

How much illustrated income performance does Whole Life 10 Pay pick up from the actual effects of 7702-2% in terms of lower death benefit and from 7702-2% in terms of a lower allowed policy loan rate? It’s about 45-55. If you were to re-run the same income scenario on the new product but at a 5% illustrated loan rate, the income would drop to about $61,778. That’s still a 10.5% increase in illustrated income versus the old product, but that leaves the additional 13% in illustrated income gains due to the new and lower illustrated policy loan rate.

In fact, MassMutual makes the comparison quite easy. Mass is one of the few companies that offers both direct and non-direct recognition loan options within its Whole Life chassis. The numbers above reflect the non-direct recognition (“Adjustable”) loan option and its current 3.25% illustrated rate for the new product. However, switching to the direct recognition (“Fixed”) loan option locks the loan rate at 6% but increases the dividend on illustrated loan values to reflect the higher loan rate. The net effect is an income of $61,038, spitting distance from the illustrated income using a 5% loan rate under the Adjustable / non-direct recognition option.

Despite all protestations in the field about the superiority of non-direct recognition versus direct recognition, the reality is that the two loan options should flow through to produce nearly identical performance in the long-run. The reason is simple – the loans are booked as assets in either case and yield on the policy loan assets are included in the dividend calculation in either case. The question is just whether the rate floats to reflect market interest rates and therefore blends into the rest of the portfolio for dividend purposes (non-direct recognition) or if the rate is fixed and the dividend paid on loaned values directly recognizes the yield from the policy loan (direct recognition). That’s the difference. One isn’t better than the other – they’re just different.

In the old product, running the Adjustable and Fixed options yielded very similar levels of illustrated income. MassMutual was, essentially, allowing for a certain level of illustrated arbitrage in either situation. How is it possible that MassMutual could illustrate arbitrage in the Fixed / direct recognition option? Because, as I’ve written before, MassMutual is somewhat unique in that it has enormous earnings coming from other business lines and ownership stakes in subsidiaries. Those earnings have to go somewhere and, because the only significant block of participating policies at Mass is Whole Life, it goes into the Whole Life block. Rightfully, both loan options in the old product reflect those outside business earnings.

The new product, however, leaves us in a bit of a quandary. The Adjustable / NDR loan option generates significantly better performance than the Fixed / DR loan option. In my view, I don’t think that should be the case. It doesn’t make intuitive sense. On the old product, if every policyholder suddenly fully loaned their Whole Life product at MassMutual and we charged the 5% loan rate, then the dividend rate (believe it or not) probably wouldn’t change very much. But in this new product, every policyholder taking a loan at 3.25% will assuredly drop the yield in the portfolio backing the product and, therefore, should materially reduce the dividend paid to that block of business. Maintaining such a low loan rate and such massive illustrated arbitrage doesn’t seem like a sustainable proposition.

But, on the other hand, MassMutual might have felt like its hands were tied. They’ve been using the methodology of setting the adjustable loan rate minimum at 1% higher than the guaranteed interest rate in the policy for decades. The old 5% adjustable loan rate was artificially high for the current interest rate environment because the minimum guaranteed rate in the product had to be set at 4%. But with the new product, the guaranteed rate is just 2% and, therefore, the minimum guaranteed loan rate is 3% to maintain the same 1% buffer as before. This extra wiggle room is what allows the loan rate to drop down to 3.25%, which is set using the Moody’s Aaa bond composite to mirror roughly what Mass would be earning (net of spread) on other new money assets. MassMutual’s design is consistent with its previous limitations and reasonable on the basis that it reflects the current market environment – it’s just that the loan rate is now a whole lot lower than it was before.

As defensible as MassMutual’s move may be, there are two big problems with it. First and foremost, this level of loan arbitrage is simply not realistic or indicative of future results. Producers should not confuse the conservatism of the product itself with the conservatism of a particular illustrated income scenario. Income using loans involves leverage and leverage always amplifies risk. To offset that risk, producers should increase the illustrated loan rate to 4.75% or 5.25% (options in the software) or run Fixed loans as the baseline. Either of these options will provide a more realistic and sustainable perspective on long-term performance. From what I understand, even MassMutual’s own rollout materials for this product don’t push the illustrated loan arbitrage to the limit and advocate for more conservative illustrations.

Second, this level of illustrated performance through loan arbitrage smacks of Indexed UL that, rightly so, has come under increasing regulatory scrutiny. For the most part, Whole Life companies have managed to stay above the fray of Indexed UL illustration regulations. No longer. In the same way that certain companies became emblematic of the reasons for regulators taking a hard look at Indexed UL, it is hard for me to imagine that the same thing won’t happen to MassMutual when the conversation inevitably turns to Whole Life illustrations. It’s going to be rather difficult for whole life companies to point out that Indexed UL companies are artificially juicing their illustrations with unsustainable loan arbitrage when Indexed UL companies will be able to credibly make the same accusation about MassMutual, regardless of whether Mass is involved in the debate or not.

It will be interesting to see if other carriers follow suit with similar levels of illustrated arbitrage. My hunch is that they won’t. Northwestern Mutual uses direct recognition loans. So does PennMutual. So does Guardian. New York Life has NDR loans, but I don’t think they’ll illustrate as much loan arbitrage. It seems as though Mass may have an edge in illustrated income that will undoubtedly be a thorn in the side of its competitors, harkening back to the days when Legacy 10 Pay swept the table on sales nearly a decade ago.

But even without the increased illustrated arbitrage, Whole Life 10 Pay would be a compelling story. The changes to the Section 7702 rate were targeted to relieve Whole Life of an existential threat and that’s exactly what they did. Secondarily, it was obvious that Whole Life would have more pricing flexibility to generate even more compelling accumulation-oriented products. MassMutual Whole Life 10 Pay is proving that to unequivocally be the case. It’s a brave new world for Whole Life.