Why it’s foolish to buy a whole life policy based on the illustrated rates

by David Lewis

Choices, choices, choices. 

At some point in the not-too-distant past, life insurance agents decided it was a cool idea to give folks a bazillion different choices, let folks choose what type of life insurance policy they want, how they want it designed, and even which company they want to go with. 

Some agents will even let their clients tell them how to design the policy, how much premium to put into term riders, base premiums, and PUA riders… and then the agent just sort of takes orders and files the paperwork.

I don’t do that. 

In fact… in my heretical opinion, agents are the experts and running an insurance brokerage that way is extremely irresponsible and probably eventually will end in a lawsuit at some point.

Agents know (or should know) infinitely more than their clients about life insurance. 

Now… don’t get me wrong. 

That doesn’t mean clients should just shut up, nod, and follow along without questioning anything.

In fact, I almost think there’s something wrong with a person who *doesn’t* ask questions before diving into whole life insurance. Makes me suspicious. Who the hell dumps $50,000 a year into a whole life policy without asking a bunch fo questions?

For my part, I show people a few different policy designs (unless they just want me to pick a company and policy for them). 

And, I explain as much about the policy as I think they’ll understand (my new Life Insurance MasterClass goes into explicit detail about anything anyone would ever want to know about any type of life insurance policy).

I even go so far as to show 2 different policies (maybe 3) from different companies, but… 

Even that can be dangerous. 

And… giving you too many choices, options, and showing you too many policy illustrations is an exercise in futility.

Here’s why:

For the most part, life insurance companies make it near-impossible to compare policy illustrations from other competing companies. 

It’s an open secret int he life insurance biz. 

Illustrations are not the same thing as your policy contract. They are a tool to explain how a policy works… not necessarily how it will perform.

Knowing how a policy works is extremely valuable information, but… it’s not the only thing you need to know. 

So, getting a policy illustration from MassMutual, and comparing it to an illustration from Penn Mutual or New York Life or Northwestern Mutual, or the Guardian will show you a few things, but it’s not as useful as you might think. 

The one thing it will show you is… which company can produce the highest guaranteed cash value and death benefit for you. 

That’s very useful information. 

Illustrations also show you how each company’s policy works. 

Also… useful.

But, in the wrong hands, illustrations can be deceptive and can be used for dishonest and deceitful purposes.

If an agent is savvy with a spreadsheet, he might be inclined to alter some of the basic assumptions in the illustration and show you policy values that have a snowball’s chance in hell of materializing. 

Or… he might downplay certain undesirable things in the policy and emphasize something that you’re sure to like. 

On the other hand… an agent might also use his powers for good. 

He might be able to reverse engineer the policy and figure out how much of the hypothetical cash value growth is due to things like a high lapse assumption (which can infer a few other things about a company). That, in turn could influence your decision to go with a particular company.

But… there are limits…

Policy illustrations won’t show you anything about how each company handles customer service, billing, how each company treats policyholders over the long-term, differences between implied promises and actual contractual promises, dividend stability over time, investment management of the general investment account, risk profile of the products being sold by the company, and so on. 

This is something that takes some investigative work and is usually not something most agents have the intelligence or inclination to do. 

What they’ll do instead is amp up the marketing angle of a company. 

For example, historical performance of a company’s whole life product doesn’t guarantee (or even imply) that company is a good company… nor does it mean they will experience the same results in the future. 

I’ve often said Penn Mutual’s dividend has been the most stable dividend out of all the mutuals over the past 20 years. That doesn’t necessarily mean it will stay that way, but what it does indicate is the company’s reputation and practice of stabilizing the dividend. 

It doesn’t say anything about future policy performance. It only says something about how management views its job in regards to running the company.

But, some agents use the historical performance of Penn Mutual to suggest that the past will be the future. 

It won’t. 

Likewise, agents sometimes use historical performance charts published by MassMutual, or the Guardian, or Northwestern, to imply that past successes will (or are likely to) translate into future successes.

When I wrote about these companies in ThinkAdvisor, I pointed out the company’s past successes, but also stressed that dividend rates change over time and are likely to continue to change based on the company’s performance in the future.

A very “DUH” statement, but you wouldn’t believe the amount of hate mail that generated from insurance agents.

Anyway, there’s just no way to know what future dividends at any of these companies will be. At most, I could say that past successes demonstrate a commitment by management to run a profitable company. But if Northwestern Mutual produces a 7% annual compound return for its policyholders over the past 20 years, it does not mean they will produce the same return over the next 20 years (and in fact, they’re not). 

They can still be profitable at a 5% return or even a 4% return.


The differences between the companies I mentioned above are… huge. 

Penn Mutual and New York Life run completely different life insurance companies. 

Guardian’s business model is totally incompatible with MassMutual’s.

And, it’s the business model that drives the dividend payments at each company. 

There are reasons for choosing a life insurance company that run far beyond the policy illustration. 

So… even if you sat down and looked at the spreadsheets showing dividend payments from different companies, it tells you nothing about what’s behind those payments, the investment philosophy at each company, and how each company handles investments and products if they happen to go sideways for whatever reason.

And those differences are what really affect how you view your life insurance policy over the next 10, 20, 30 years and, ultimately, how it performs.

It’s not necessarily a matter of good or bad. 

All the companies I mentioned above are good… in their own way. They all have strengths and weaknesses. 

And, they all cater to specific markets for specific purposes.

None of this is apparent on the policy illustration though.

But, what most life insurance agents focus on (and what most policyholders are taught to focus on) is only the non-guaranteed portion of the policy’s illustration. 

They focus almost exclusively on the numbers, and ignore the underlying value of the company and its whole life contract.

It’s one column of one page of a 30-40 page document. 

And, based on that one column, on that one page, life insurance agents somehow make recommendations to their clients that will affect them for the next several decades of their life. 

It’s friggin’ insane. 

No honest and legitimate life insurance agent runs their business that way. 

Sure, it’s fun to make marketing pieces showing the potential cash value growth.

But, making a decision based solely or primarily on hypothetical numbers?

Get real. 

Now… let me take a step back for a moment here, because I’ve probably turned over at least one apple cart. 

You are not a life insurance expert (unless you’re an insurance agent). 

The easiest thing for you to see is the guaranteed cash value and death benefit of a policy. These numbers are “set in stone”. They are the worst case scenario. And, I wouldn’t blame you at all for choosing a policy based solely or primarily on these guaranteed values. 

It makes good, logical, sense. 

Your agent, however, should be able to guide you through this process, look beyond the numbers, and help you find a company that is fundamentally strong with the highest guaranteed cash value possible *and also* the highest long-term potential cash value and death benefit growth given your financial goals. 

Nobody wants a poorly performing policy. But, nobody wants an unrealistic illustration that is unlikely to pan out either. And nobody wants their insurance company to blow up and go insolvent because they mismanaged the general investment account in the name of paying an unsustainable dividend payment.

A lot of the choices an agent makes about choosing life insurance companies to work with is “behind the scenes stuff” (stuff I’ll be covering more in my Life Insurance MasterClass for interested clients). 

It’s not that you can’t understand it. But, it’s not something you’d easily remember or get a lot out of if I rattled it off during a first or even second phone meeting. It would probably be a little bit confusing. It’s stuff that’s best learned slowly, over time, and usually… learned after the fact while you are “getting to know” your life insurance policy and what it can do. 

This is why trust is so damn important in the life insurance business, and why it’s so frustrating to see life insurance agents running cheap marketing gimmicks on YouTube.

Anyway, if you want more inane ramblings about life insurance from some dude on the Innernet, go sign up to my free email list. The stuff you’re reading here is about 1/30th of the stuff that you get just by reading my free daily email.

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About David

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.