#356 | Northwestern Mutual Enters the 10 Pay Fray

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Quick Take

At first blush, Northwestern Mutual isn’t a natural fit for the highly competitive and quickly growing 10 Pay Whole Life market. Illustrated performance in short pay products generally favors companies with high Dividend Interest Rates, yet Northwestern lags its peers in terms of pure DIR. As a result, so does the illustrated performance of its new 10 Pay product. However, there’s more to the story. Northwestern’s lower expense load translates into the most efficient 10 Pay product on the market, a key element of the core Northwestern story of how it delivers long-term value. But more importantly, the top end of Northwestern’s advisor force has shifted over the past decade towards an integrated approach to financial planning, asset management and insurance in a way that has put more focus on life insurance as an asset class alternative. The usual tool for these advisors is a fully blended Whole Life 100 product, but 10 Pay gives them a way to generate similar returns with less complexity. For Northwestern, the 10 Pay releasing a 10 Pay isn’t about competitive pressure – it’s about filling out the portfolio.

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More than any other major life insurer in the market, Northwestern Mutual is seemingly impervious to product fads and competitive pressure. They don’t run underwriting specials. They don’t sell cheap products with rich guarantees. They don’t fight illustration wars. In other words, they don’t employ the tactics used by virtually every other life insurer in the industry to win business. And yet they remain immensely successful, selling $1.2 billion of new premium* in 2022, more than any other life insurer.

The fact that Northwestern Mutual refuses to play the competitive game means that there is an entire cottage industry built on convincing Northwestern agents to put business “outside.” Over time, these poachers have shifted their tactics. Decades ago, it was all about impaired risk underwriting. Then came “cheap” Universal Life, aggressively priced Guaranteed UL and aggressively illustrated Indexed UL. For each of these, Northwestern Mutual refused to meet the challenge head on with their own offering. Instead, they basically rode it out or created their own oblique way of meeting the challenge that fit within the motif of Northwestern. Their bet was that the fads would ultimately fade and wouldn’t sway the conviction of their agents. And, ultimately, that has largely proven to be the case.

Part of the reason why Northwestern has proven to be somewhat immune to the outside pressure of these past product fads is because they represented a departure from what Northwestern agents were used to selling. It’s a big leap to go from Whole Life to Indexed UL, for example. But over the past few years, there’s a new set of poachers with a different weapon – Whole Life with better illustrated performance than Northwestern’s courtesy of higher Dividend Interest Rates offered over the past decade by some of Northwestern’s fiercest competitors, all of which are also brand names with strong financial ratings. The leap for Northwestern agents to place business outside is much, much smaller. And as a result, the poachers seem to have been more effective.

The difference between Northwestern and its competitors lies in the fundamental philosophy and strategy of how to deliver long-term value to clients. Whereas Northwestern has stuck to its knitting as a true-blue mutual company selling only participating policies and rigorously managing expenses and mortality, MassMutual and New York Life have built up huge businesses outside of Whole Life that are throwing off real profits that tangibly augment their dividend interest rate. Even Guardian has pushed further into outside business activities. The shift has created a tangible difference in results for the four companies, with Northwestern’s DIR sitting 0.75% or more below its competitors.

The differences in corporate strategy have percolated down to product focus. Northwestern Mutual remains committed to the traditional Whole Life space – extended-pay policies sold primarily for protection, where expense and mortality management is essential to competitiveness and long-term value for policyholders. New York Life and Mass Mutual, by contrast, have shifted towards short-pay products sold for accumulation where illustrated and long-term performance is far more dependent on investment returns that can be propped up by outside business earnings. There, New York Life, Mass Mutual, Guardian and Penn Mutual all have the upper hand on Northwestern, at least for now, and it shows in the illustrated performance of their products.

Nowhere has this effect been more pronounced and more effective than in 10 Pay Whole Life, which now constitutes the largest product at both New York Life and Mass Mutual and a rapidly growing market from which Northwestern Mutual has been conspicuously and curiously absent. Northwestern Mutual actually filed a 2% guaranteed rate 10 Pay product back in 2021 but didn’t actually release it until two weeks ago. If the competitive pressure was building up, if this market was growing quickly and Northwestern was missing out, if this was a defensive move to shore up a vulnerability, then why did they wait so long to release it?

The answer, I think, is that Northwestern’s 10 Pay isn’t a response to any of those things. If it was, then it wouldn’t be a very effective one. The 10 Pay market revolves around illustrated performance. Because 10 Pay illustrated performance is dominated by the interest rate component, Northwestern’s 10 Pay is off the pace against its peers. Take a look at comparable illustrated performance for a 45 year old Preferred Male:

Product (Rate)Dividend Interest RatePremiumIllustrated Peak IRR
New York Life (2%)5.80%69,8704.60%
Penn Mutual (3%)5.75%49,9604.60%
MassMutual (2%)6.00%71,4004.50%
Guardian (2%)5.75%63,8504.30%
Northwestern (2%)5.00%66,0704.10%
New York Life (3%)5.80%45,3604.10%

However, I think this sort of illustration comparison misses a subtle but very important point. Although Northwestern falls at the bottom of the chart, it actually does more with less. The gap between the DIR and illustrated IRR is 1.15% for Penn Mutual, 1.2% for New York Life, 1.45% for Guardian and 1.5% for MassMutual – but it’s just 0.9% at Northwestern Mutual. Why? Because the other two components of pricing still matter. Expenses are often priced into the DIR as a spread, which means that the net interest credited rate to the policy values is less than the DIR itself. Lower expenses should result in a lower spread and there is no debate about the fact that Northwestern runs the tightest ship in the industry when it comes to expenses.

You can get a feel for the expense spread in the DIR by looking at year-over-year cash values after endowment because there is no mortality or premium-based expense component. For the MassMutual 10 Pay, the net cash on-cash credited rate post-endowment is 5.4%, implying a 0.6% spread to the DIR. For Guardian’s 10 Pay, the spread is 50bps. But if you run the exact same calculation for Northwestern Mutual, the spread is just 15bps. Northwestern’s product may not illustrate the best, but it is the most efficient. To put it another way, if all of the DIRs were the same, then Northwestern’s product would actually be on top. It is the “best” product on the list if pure efficiency is the metric.

However, pure efficiency is not the metric used in the field because DIRs are not all equal. These companies are all pursuing their own strategies to grow and deliver long-term value for policyholders. Those strategies have real implications for the interest earnings available to policyholders. It may come to pass that DIRs will compress and normalize in the future, which will shift the balance of power between the companies and the competitiveness of their products. That situation would swing the balance of power back to Northwestern. But given the current gaps in DIRs, 10 Pay products favor companies that emphasize high investment returns and outside business earnings over expense management. And that ain’t Northwestern Mutual.

In my view, competitive pressure wasn’t the triggering event for Northwestern releasing a 10 Pay. This isn’t about grabbing or defending market share. This is about putting another arrow in the quiver of its agents to use in certain situations where a simple, straightforward, ready-made short-pay product makes sense. It’s about how Whole Life fits in a client’s portfolio and the fact that, in some situations, long-pay products aren’t optimal. The competitive positioning for the product is the same as all other Northwestern products. It doesn’t win on the illustration, but it does win in terms of efficiency and (from Northwestern’s vantage point) the ability to deliver sustainable long-term value to customers. A 10 Pay product simply rounds out Northwestern’s portfolio.

However, I think there’s more to the story. The elusive holy grail of the life insurance industry is getting financial advisors to routinely use life insurance as a part of holistic financial planning. Everyone has tried it. Merrill Lynch spent tens of millions of dollars on consultants and new hires to build an army of life insurance specialists to embed in its financial advisory teams. It flopped. Edward Jones has had a top-down push for life insurance for a couple of decades, has built a unique distribution structure staffed with dozens of wholesalers from insurers and brokerages and is broadly regarded as the most successful institution in terms of life sales penetration – and they’re in single-digits for adoption. Every institution has its own war stories about failed life insurance integration initiatives. Everyone recognizes that life insurance should be a part of financial planning. Everyone also recognizes that getting financial planners to talk about life insurance is exceedingly difficult, if not downright impossible.

Instead, the biggest success stories in the integration of financial planning and life insurance has been companies who have come at the problem from the other angle – turning life insurance agents into financial planners. No one has been more successful at doing that than Northwestern Mutual**. In 2010, Northwestern’s Broker Dealer brought in just $450M in revenue compared to $827M in new life insurance sales. Of that $450M in broker dealer, just $150M was from asset management. Last year, the Broker Dealer brought in a whopping $2.2 billion in gross revenue, $1.5 billion of which is asset management fees, versus $1.1 billion in new life insurance sales. It is clear that there is at least a subset of the Northwestern Mutual advisor force – which includes more than 1,300 CFPs as of 2020 – that has fully embraced the integration of financial planning, asset management and life insurance. They’re taking a different approach than many of their peers.

As a result, they’re selling life insurance differently, too. Northwestern Mutual is the 4th largest seller of Variable UL. In my experience, Northwestern advisors who are selling VUL are generally doing it in the simplest possible way – taking a client’s taxable portfolio and putting it inside of a life insurance policy in order to achieve control of tax incidence. The story isn’t about illustration gimmickry. It’s about using life insurance in financial planning, the way it should be done. And if a fixed strategy is a better fit for the client, then Northwestern also offers a compelling Universal Life product that is the #1 selling UL in the industry by a landslide, nearly doubling its closest competitor (John Hancock) in 2022. Even without Whole Life, Northwestern Mutual would be a dominant player in life insurance. No other company has as diversified of a mix of permanent insurance sales as Northwestern.

They’re even selling Whole Life differently. Over the past few years, I’ve seen a high prevalence of fully-blended products being sold by top Northwestern Mutual reps. The most common design uses Northwestern’s standard Pay to 100 product, but with a $50,000 base face amount and the rest as Term. Unlike the problematic Northwestern policies of previous decades where Term was used to minimize illustrated premiums, these policies are funded to or near the maximum non-MEC limit. The net effect is that the policy is exceedingly efficient – think 75bps or less in long-term difference between the cash value IRR and the DIR. It also has high early values, far higher than a typical all-base Whole Life contract. The larger the policy, the more efficient the structure as the base face amount becomes a smaller percentage of the total face amount. In short, this blended Whole Life structure is hugely compelling, especially for very large policies and very large premiums.

The tradeoff is, of course, compensation. Agents are paid only on the required Whole Life premium, which is the sum of the base premium and the required premium for the term component, and a couple of percentage points on excess premiums. On large cases, total compensation for designs like this are 20% or less of what it would have been for an all-base contract. But that’s a false comparison. Top Northwestern agents have figured out what the rest of the industry has yet to realize – the sale probably wouldn’t have happened if the policy was built as all-base. Blending removes virtually all of the objections that clients, especially very high net worth clients, typically have to using life insurance as a fixed income alternative. Northwestern advisors selling Whole Life this way are playing the long game of asset management, not insurance commissions, and using Whole Life as a part of an overall portfolio.

What’s the difference between a Northwestern advisor who charges fees on assets under management and sells fully blended Whole Life and a fee-only RIA who sells no commission life insurance products? In terms of the actual revenue and business model, not much. The main difference is the fact that there are a lot of Northwestern advisors using this model and very few RIAs. In fact, most of what I see in the RIA space is fee-based RIAs selling fully commissioned life insurance policies. It’s a strange twist of irony that some “captive” insurance agents are doing what many RIAs won’t in terms of selling low commission life insurance as a part of integrated financial planning and asset management.

However, selling fully blended Whole Life isn’t for everyone. It requires an established asset-oriented block and high net worth clients. It’s a more complex design to sell and administer. There is still a need for a simple, straightforward product solution oriented specifically for accumulation. Enter the 10 Pay. It sacrifices early values in favor of paying market-rate (although still lower than WL100) commissions, but delivers long-term performance that is spitting distance from a fully blended Whole Life 100 design. There’s a natural market for a product like this in situations where simplicity is a selling point and for advisors who want a more traditional compensation model. In short, it rounds out the Northwestern portfolio.

The lesson in the 10 Pay at Northwestern isn’t about competitive positioning against other life insurance companies. The success of Northwestern isn’t built on illustrated performance – it’s built on a fundamental conviction amongst its advisors about the essential role of permanent life insurance in financial planning and Northwestern’s ability to deliver fair long-term value in all of its products from Variable UL to Universal Life to Term to Whole Life. While Northwestern may lag its peers in terms of illustrated performance because it has chosen not to pursue a strategy of building outside business earnings, it leads its peers in the integration of financial planning, asset management and life insurance. And in the long run, that may very well prove to be the superior strategy.

*Using LIMRA’s annualized plus 10% excess metric across all Life product lines

**Data from InvestmentNews, FA Magazine and Northwestern Mutual earnings releases. Other firms are also seeing significant shifts towards investment management and financial planning, most notably MassMutual, who has a BD that ranks near Northwestern in terms of revenue. However, MassMutual’s BD shows a major skew towards variable insurance products, particularly VAs. The same generally goes for Equitable. What makes Northwestern stand out is not just its size, but also its focus on AUM rather than insurance product revenue within its BD.