Comparing Northwestern Mutual’s Term Insurance – Case Study # 7

I just finished an insurance review for a Michigan business owner. The results were straightforward and with a company I deal with regularly- Northwestern Mutual. NML is an excellent company, as their agents will tell you, but like all companies they have their strengths and weaknesses. An eclectic strategy can use them for some needs but not all. Even in their strong areas (cash value life insurance) there’s a vast disparity among cash value policies within their portfolio. We addressed that with the Dr. Ryan Wetzel who is featured on our Testimonials page with an accompanying blog.

Here I’d like to compare NML’s term life insurance rates to alternatives. The first step is to ascertain the appropriate amount of insurance. This client had $1.2 million of term life insurance with NML. He is well-managed with a strong income, emergency fund, debt-free, and retirement assets. Because of his large young family, should he die, Social Security Survivorship benefits would be over $4,000/month until the children were age 18. This is something he did not fully comprehend. In light of his assets, and after careful review with his wife, they felt comfortable reducing his life insurance to $1 million.

From there it was simply a matter of shopping for a term policy with more favorable rates.
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NML’s term insurance was convertible to a more favorable whole life policy, but the client and I discussed this and he was not inclined is to use whole life anyway. The new company’s financial strength was slightly less than NML’s, however this is not as important for term insurance as for cash-value insurance.

He paid me a fee of $675, higher than most reviews. However it took over seven hours of time, carefully and objectively considering his assets, goals, and sentiments. (I also reviewed his Northwestern disability policy which was left intact, and his wife’s life insurance which they changed for additional savings not reflected above.) He adjusted down to a more appropriate amount after having it brought to his attention the survivorship benefits that commissioned agents rarely explain. There were over 50 emails over several months. I walked him through the underwriting process, though I did not sell the replacing term policy.

We got the best of the best; found a strong company with very favorable rates and he got the superlative risk category. It was worth the effort, he will recover his fee the first 14 months and earn (by saving) a substantial tax-free return on his investment, far better than any other way he could “invest” $675.

Most who think they are with a “great” company have little idea of how much they can save. That’s what objective experienced guidance provides and why Scripture so frequently commends it- Proverbs 1:5, 11:14, 15:22, 20:18, 24:6.

Is Employer-sponsored Voluntary Term Life Insurance a Good Buy? – Case Study #6

I just finished a case with an officer of a large company who had most of his life insurance through his employer. They paid for an amount equal to 2X salary; he paid for another 5X. Like a convenience store, employer sponsored life insurance makes it easy to buy: proximity, no full blown physical, check the box, and payroll deduction. However just like a convenience store, it’s not cheap.

Often 2X or 3X salary are offered “guarantee issue”, meaning there is no health screening at all. This invites higher risks. Those who sign up first often have an insurability problem – diabetes, DUI’s, obesity, smoker, etc. Insurers call this adverse selection and to provide for the inevitable higher claims they must charge more.

Even higher levels of coverage require only an abbreviated health questionnaire, far less rigorous than for an individual policy with its paramedical exam, blood testing, requesting medical records, etc.

Therefore rates charged under voluntary plans at work are always higher than favorable rates for an individual policy. I don’t just mean higher than the best risks, but also higher than the mild-hypertensive, slightly-elevated-lipids, or two-speeding-ticket risks.

If you have a major health issue, employer-sponsored life insurance may be a good buy, but if you don’t you can probably do better.

Here are some other advantages of individual policies. Most employer sponsored term plans have five-year rate bands with rates increasing at age 35, 40, 45, 50, and so on; most individual term policies have level premiums for 10, 15 or 20 years. Term insurance through work usually ends at retirement or termination of service; an individual policy goes with you regardless of employment.

One touted advantage of group life insurance is that $50k or less can be paid with pretax dollars. This small tax advantage is usually more than offset by the higher premium rate.

The popularity of employer sponsored plans is understandable. A new employee dealing with an avalanche of paperwork finds it easiest to check the box without fully understanding alternatives. Because it’s then automatically deducted from their paycheck before even seeing it, this out-of-sight-out-of-mind but ill-conceived financial tool can roll on for decades.

Remember the step that precedes all this is choosing the appropriate amount. Though buying in multiples of salary is a reasonable way for an insurer to administer a group life plan, it’s not the way a consumer should choose an appropriate amount of life insurance.

Also remember the new policy should be approved and in force before discontinuing voluntary insurance at work. Many people think discontinuing group term can only be done once per year during open enrollment period, however this time restriction does not apply to group life insurance over 50k .

After an amount is determined, then the most competitive individual term policy should be chosen, considering the nuances of your health. A duration needs to be chosen. If you need help in the process, that’s what we do

An Important (often overlooked) Feature of Term Life Insurance – Case Study #5

I’m currently doing a Life Insurance Checkup for a couple in Tennessee that underscores an important cost aspect of level term life insurance…but it’s not the premium rate.

The first step in a Checkup is rightsizing the size policy. This couple, like many, used a rule of thumb (a multiple of income plus debt) promoted by Dave Ramsey, whom I highly respect. However rules of thumb are a crude way of giving wholesale advice. I prefer fine-tune efficiency which comes best through customization. The difference can be dramatic, as it was in this case.

He is a veteran construction manager who had already retired from one employer and had a pension with a significant monthly survivorship benefit for his wife. (This is tantamount to a lot of life insurance.) There are no kids in the picture, they have a reasonable 401(k) and a $750K life insurance policy on him with Allianz. Their emphasis is on debt repayment and they don’t want to spend unnecessarily on anything, including life insurance. After reviewing her income needs and their assets and debts, they think the appropriate insurance need is $350K rather than $750K. How do we best make this adjustment?

The easiest way would be to reduce the current policy. Allianz is a strong company, ranked AA with Standard & Poor’s. He bought this 20 year level term policy four years ago when younger, so a comparable policy would cost more today at his older age. Also, if he had had a health decline it would put him in a higher rate category.

The problem is, though many companies allow a policy reduction during its lifetime, Allianz does not. Some allow it only once during the policy’s life and some allow multiple times. Since Allianz doesn’t at all, it forces him to consider a new (appropriate amount) policy, at an older age, subject to insurability, losing the reserves of the old policy, new contestability period, new commissions, etc.

Let me take a moment to emphasize an important aspect of insurance planning: the amount of insurance you need is rarely static. For most people it reduces as assets grow (401(k), savings, etc.) and liabilities diminish (mortgage is repaid, young children mature, etc.) So the thought that you’re going to need the same amount of insurance for 20 years is probably unrealistic. Yet many people buy such policies and keep them at the original amount for decades. This accounts for the invisible waste of much premium, as people imperceptibly become over-insured. Few people reassess (even if it’s only every 5 to 10 years) their insurance needs…though it’s usually profitable to do so.

Reducing term policies (almost a relic of the past) recognized this dynamic: the amount of insurance needed declines over time. Today’s most competitive policies (level term policies) do not. Thus it’s incumbent on the consumer to make his own adjustments. To do so your policy must permit it.

So when you’re buying a term policy, be sure to find out if the policy owner can reduce its amount at least once during its life. Another possibility is buying multiple policies for different durations: for example a 20 policy for $350K, and 10 policy for $400K. This automatically schedules a decline in insurance as your needs likely decline. The problem with this is that you don’t know the rate at which your needs will decline. Another problem is poorer pricing on multiple/smaller policies.

We tend to think that buying a good term life policy is simply a matter of buying a strong company with low premiums. However there are other important features. The ability to reduce the policy at least once during its life is one of them.