A cautionary tale for those chasing rate of return

An email reader writes in:

David, I really enjoy your “commentaries” & have a good grasp on the value of dividend paying mutual WL insurance. I just wish it was easier to determine which ML company over the long term provided the best IRR & is best for “IBC”. Any thought or direction is appreciated. I’ve always had this thought  – Why is it necessary for a good (old/proven} WL Mutual company to work out of elaborate corporate building (cost!) and pay upper management & staff crazy amounts of $$$ (cost!). The folks that should be compensated are the accualarist and those investing for the company that help provide the strong rates of return to the members (5-7%) year in year out. In this day of online services, a company could operate with a small staff & out source many of the mundane tasks and seriously reduce internal costs and provide the members with a higher rate of return. Just an observation. 

Excellent observation and questions. 

In a past email, I cautioned against buying any life insurance policy based on a high illustrated rate of return. 

Not that a high rate of return is bad per se. But, a high hypothetical illustrated rate of return doesn’t necessarily mean much. If anything, the minimum guarantees of the policy are the most informative.

And… past performance of the company doesn’t mean much either (yes, even if the company touts its dividend history and in-force policy performance). In fact, relying on a company’s historical performance can be very misleading if you’re using it to buy a new policy.

And, in some respects, even ratings from rating agencies don’t mean much, including Comdex scores. All those ratings and scores do is tell you about a company’s past successes, not whether it will be successful into the future. 

Don’t get me wrong. A long history of past successes is not a bad thing. But, Ohio National had a long history of success, and that didn’t save it.

People in the investment world have been getting hit over the head forever with this — past performance is not indicative of future performance. Some ignore it and get their clock cleaned (eventually). Others find another way to manage that risk. 

Policyholders of mutual life insurers need to learn this lesson too. 

I also cautioned against looking at “cheap” life insurance and “discount” companies or business models (though, I totally get why someone might ignore my warning and go for it anyway).


Well, in my humble (but accurate) opinion, all you have to do is observe what is happening right now to Ohio National — an “old” mutual started in 1905, which just recently decided (by a unanimous decision of the board of directors), to demutualize and become a stock company. 

Despite management puffing its chest, and despite the obvious corporate spin, the company just agreed to be bought out by a no-name Canadian company because they are desperate for $500 million of capital. 

They claim this demonstrates their financial strength and that this is the next evolution for the company, yada yada yada.

Pretty much everyone in the industry sees right through this. Word on the street is, if they don’t get this money, it’s big trouble in little Ohio. 

Despite doing all the “right” things, Ohio National is in trouble and trying to figure out ways to get out of its own business. 

For example, it spent many many years selling:

  1. Cheap universal life policies
  2. Cheap variable annuities, with generous guarantees for policyholders; and,
  3. Very competitive whole life insurance with very high illustrated rates of return. 

Instead of being one of the strongest life insurers in the industry (which they should be according to their financial ratings), they are instead on their knees with their nose open right now, begging for money.

All that’s left is for policyholders to vote on the matter. 

… which i suspect will end up confirming demutualization. 

Policyholders don’t have too many options at this point, and management knows it. And so do policyholders. And so do agents.


When a company demutualizes, it’s no longer owned by its policyholders. Instead, it’s owned by outside shareholders. 

Some of Ohio National’s whole life policyholders are part of a “closed block”, meaning their dividends are likely to continue, albeit most probably at a lower rate. 

Probably at a much, much, much lower rate.

That’s the good news. 

But some of their policyholders are in an “open block”, and so what might happen is… those dividends are up for grabs. In other words, there is a non-zero chance they might lose all future dividend payments. 

How did this happen?

The short answer is: management took too much risk with policyholder money. 

OK but how did they take too much risk?

They sold exactly what insurance agents, and the overwhelming majority of customers think they want — cheap life insurance and annuities with very high guarantees. 

But hark unto me, True Believer. 

No matter how much you think you want cheap insurance, what you really want is expensive insurance. 


Because cheap insurance is risky. It places a lot of burden on the life insurer. And, Ohio National is a prime example of why mutuals generally sell expensive guarantees, and not cheap ones. When a mutual sells something “cheap”, it probably will come back later to bite them (and policyholders) in the arse. 

Cheap = risky in the life insurance world. 

That doesn’t mean you can’t have a “low cost” policy with “high yield”. 

It just means the insurer has to charge enough money for the guarantees (and returns) they’re selling you. 

The whole point of life insurance is to transfer risk to the insurer so you don’t have to take it all on yourself. But the insurer has to be able to afford it.

One more thing on company expenses:

Usually, the CEO of a life insurance company is also the company’s chief actuary, or chief investment officer, or has a specialty and expertise related to one of the two (or both). 

It’s not really a place where you want to cut costs. Good talent is usually expensive, but cheap talent is usually even more expensive. 

Anyway… feel free to shoot the messenger or send me some hate mail or just troll me with your best one-liner. 

It won’t change anything. 

The reality is… guarantees are expensive. 

Always have been. Always will be. 

It’s a principle of risk management, not a tactical play.

That’s not true just for life insurance though… it’s true for anything that’s guaranteed. 

I realize that might be a turnoff for some, and that’s fine. I know not everyone agrees with my opinion. Again, that’s fine. I’m not asking for anyone’s agreement.

You are free to buy insurance from wherever you want. It doesn’t have to be expensive insurance. 

You have the right to buy cheap insurance. 

But… you have been forewarned. So, no complaining if you choose unwisely. And, don’t tell me about it if you do.

David Lewis, AKA The Rogue Agent, has been a life insurance agent since 2004, and has worked with some of the oldest and most respected mutual life insurance companies in the U.S. during that time. To learn more about him and his business, go here.