Northwestern Mutual Life Insurance vs Vanguard Index Fund

[786783]

Northwestern mutual life insurance for 5% returns every year, or a vanguar index fund with an expected 6% return/year?

Thanks.

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[sazerac]

Northwestern mutual life insurance for 5% returns every year, or a vanguar index fund with an expected 6% return/year?

Thanks.

What are the annual fees on this life insurance product? For Vanguard it will be about 0.05%.

What is the exact process to convert $100 of the life insurance product into $100 cash in your checking account the day after you open it? A year after you open it? For Vanguard it would require a couple mouse clicks to redeem shares and send it via ACH to your bank.

 

[goodoldalky]

In general whole life is a bad investment. Barring some unusual reason to do this, you are better off investing in the index fund. Whoever is trying to sell you this product isn't going to give you a straight answer on this.

There are many articles online you can read that will land you at the same conclusion.

 

[cpants]

There is definitely not a guaranteed 5% return with this insurance. Whatever the guaranteed return actually is, the fees are massive and they don't mention that during their sales pitch. Furthermore, it's not liquid and you won't be able to get out of it without losing a lot of money. If you let the policy lapse because you temporarily can't afford the massive premiums, you will lose money.

Try to read the fine print. Unless you understand it (which you won't) and can easily explain how the product functions and where the fees are going--walk away.

 

[MD Financial Services Scott]

Be sure to look at the illustration carefully especially Premiums paid and Net Surrender or Cash Surrender value (the $$ you can actually get back at any one point). Don't be distracted by the Accumulated value since to you that does not mean much. You will probably be 10 years before the cash value = premiums paid. If this is something you want to do then ask your rep to get you a policy that waives 90%+ of all surrender charges in other words if you put in $10k make sure in the Cash Surrender column that after year 1 you have $9,000. This type of policy (majority of surrender charges are waived) is out there and your rep should have zero reservations about showing you this but if they do have reservations then I would decline the product. Majority of the time the carriers reduce our compensation to give you the flexibility to cancel the policy and that is why you don't see it these surrender free or low surrender fee contracts in the market. The reason this is critical, in my opinion, is that if you have a change of mind down the road the financial penalty is not that bad since even though you would lose some money you did have insurance and that cost has to come from somewhere.

As for the 5% dividend, yes NWM has been consistent with their dividend but that is not the Net accumulated policy increase due to the mortality and administrative expenses that are applied to the policy. Simply look at any year 2 on the illustration where it shows you the prior cash value + premium + 5% then you will see -costs.
Hope that helps.

 

[786783]

Was not expecting all these informative replies. Thank you all. The decision seems obvious now.

 

[sazerac]

Was not expecting all these informative replies. Thank you all. The decision seems obvious now.

There is an easy to find book called The White Coat Investor and it analyzes whole and universal life policies. Savagely. Read it and be more informed.

We're here to help.

 

[786783]

Ok. Here are the hard numbers. So there is a 3.48% increase from year 19 to 20 in the Guaranteed Cash Surrender Values, and that percentage is comparable to every other two years. That percentage is AFTER fees and expenses have been paid so that is the REAL number I should be looking right?

3.48% looks horrendously low for a ROI, but this is what a defensive "investment" should look like?

I really appreciate your feedback!!

 

[cpants]

Ok. Here are the hard numbers. So there is a 3.48% increase from year 19 to 20 in the Guaranteed Cash Surrender Values, and that percentage is comparable to every other two years. That percentage is AFTER fees and expenses have been paid so that is the REAL number I should be looking right?

3.48% looks horrendously low for a ROI, but this is what a defensive "investment" should look like?

I really appreciate your feedback!!

You would be crazy to dump 2 million bucks into this over 8 years. Let's assume you have 250,000/year to invest yearly for the next 8 years. Invest it into a reasonable mix of stock and bond index funds -- say 60% stocks and 40% bonds. Historically, that has returned over 8% yearly, but let's be pessimistic and say it only returns the same 3.48% you calculated from the life insurance. After 8 years you would have $2,300,000. Say you never invest another dime and sat on that money for another 12 years. At year 20 you would have over $3,500,000 in savings. Again, this is a pessimistic estimate. If returns approach historical averages you could have double or triple that. This would be money that you could spend at any time with no restrictions.

Compare this to your insurance product. It would take until year 12 til your guaranteed cash-in value even breaks even to the premiums paid -- and then you start getting guaranteed 3.48%. That's 0% rate of return for 12 years (actually negative rate of return as the policy is worth less than what you paid into it). Meanwhile you've lost out on years of compounding interest on all that cash if it had been in actual investments.

Furthermore, the money is trapped in an illiquid policy that will require you to borrow it from the policy to spend. You can never spend it down to zero. There are basically only downsides to using this for an investment.

Unless you have some pretty specific circumstances that require permanent insurance for estate planning purposes, whole life is not appropriate for you. It's not an investment.

Run from this -- fast.

 

[786783]

You would be crazy to dump 2 million bucks into this over 8 years. Let's assume you have 250,000/year to invest yearly for the next 8 years. Invest it into a reasonable mix of stock and bond index funds -- say 60% stocks and 40% bonds. Historically, that has returned over 8% yearly, but let's be pessimistic and say it only returns the same 3.48% you calculated from the life insurance. After 8 years you would have $2,300,000. Say you never invest another dime and sat on that money for another 12 years. At year 20 you would have over $3,500,000 in savings. Again, this is a pessimistic estimate. If returns approach historical averages you could have double or triple that. This would be money that you could spend at any time with no restrictions.

Compare this to your insurance product. It would take until year 12 til your guaranteed cash-in value even breaks even to the premiums paid -- and then you start getting guaranteed 3.48%. That's 0% rate of return for 12 years (actually negative rate of return as the policy is worth less than what you paid into it). Meanwhile you've lost out on years of compounding interest on all that cash if it had been in actual investments.

Furthermore, the money is trapped in an illiquid policy that will require you to borrow it from the policy to spend. You can never spend it down to zero. There are basically only downsides to using this for an investment.

Unless you have some pretty specific circumstances that require permanent insurance for estate planning purposes, whole life is not appropriate for you. It's not an investment.

Run from this -- fast.

Amazing response. Thanks for your analysis.
However, where can I get information about this 60:40 mix? Over 8% yearly seems a little exaggerated.

 

[goodoldalky]

To piggyback on cpants (who is absolutely correct):

Let's use maths to answer this question.
You have been offered a policy where you can put 250K premiums times 8 years into it, with the "upside" as sold to you of a guaranteed cash out value of 2.7 million in 20 years, or 6.9 million at age 77. I don't know your age so let me guesstimate so that I can compare the math, let's say you are 37 for arguments sake.

Let's take VTSAX as an example of a total market index fund through Vanguard with an expense ratio of 0.04% as your alternative choice to this life insurance product, and let's pretend that you take the money you would have put into this life insurance into VTSAX. $250K per year for 8 years, then you stop putting anything into it and let it grow. Let's assume the average returns since inception of 6.18% of this fund hold at an average of 6%.
After 20 years, you'd be looking at $5.244 million (including the ER, which is basically nothing with VTSAX), and in 40 years (age 77), you'd be looking at a number I can barely type, $16.69 million.

If someone has actually advised you to buy this, now you know how horrendous that advice is. You're $2.5 million in the hole in 20 years and $10 million in the hole in 40 years.

If you want life insurance, buy life insurance. Term life insurance. If you want an investment, buy an investment. If you want to give 10 million dollars to Northwestern Mutual over the next 40 years, buy this product.

 

[cpants]

Amazing response. Thanks for your analysis.
However, where can I get information about this 60:40 mix? Over 8% yearly seems a little exaggerated.

See below link with historical returns for various portfolio blends of stock/bonds:
Portfolio allocation models

 

[TexasPhysician]

Stay away from whole life

 

[Fatihful Steward]

Northwestern mutual life insurance for 5% returns every year, or a vanguar index fund with an expected 6% return/year?

Thanks.

Would need to know more about the internal expenses of the life insurance policy. However, in most cases you'd be better off to purchase a term life policy and invest separately.

 

[The White Coat Investor]

Northwestern mutual life insurance for 5% returns every year, or a vanguar index fund with an expected 6% return/year?

Thanks.

I think you need to do a lot more research about how whole life works (and personal finance in general) if your question boils down to the above. I could write a book about what is wrong with your statement. Here are a few questions you'll want an answer to:

1) What is the expected and guaranteed return on your whole life policy the first year? (The answer is probably in the -40% range)
2) Why isn't it 5%? (Because that's not how whole life insurance works.)
3) What is the guaranteed and expected return of a whole life insurance policy if I hold it my entire life? (About 2% and 4% for most of the NML policies I see docs purchase.)
4) What is the historical return of the Vanguard 500 Index fund from Inception until today? (10.97%)
5) What is it likely to be going forward over the long run? (Nobody knows, but it'll probably be in the 5-10% range.)
6) Does a dividend rate of 6% on my whole life policy mean a return of 6%? (No. The dividend rate and the return are very different numbers.)
7) Why is this guy trying to get me to buy a whole life policy? (Because he gets paid a commission of 50-110% of the first year's premium to do so.)
8) How much does he get paid if I go to Vanguard and buy an index fund? ($0)
9) Which of two "investments" would a financially savvy physician purchase? (The index fund)
10) How do I get my money out of a whole life policy in retirement? (You borrow against the policy. Like all loans, that is tax-free but not interest free.)

Should I go on?

 

[786783]

I think you need to do a lot more research about how whole life works (and personal finance in general) if your question boils down to the above. I could write a book about what is wrong with your statement. Here are a few questions you'll want an answer to:

1) What is the expected and guaranteed return on your whole life policy the first year? (The answer is probably in the -40% range)
2) Why isn't it 5%? (Because that's not how whole life insurance works.)
3) What is the guaranteed and expected return of a whole life insurance policy if I hold it my entire life? (About 2% and 4% for most of the NML policies I see docs purchase.)
4) What is the historical return of the Vanguard 500 Index fund from Inception until today? (10.97%)
5) What is it likely to be going forward over the long run? (Nobody knows, but it'll probably be in the 5-10% range.)
6) Does a dividend rate of 6% on my whole life policy mean a return of 6%? (No. The dividend rate and the return are very different numbers.)
7) Why is this guy trying to get me to buy a whole life policy? (Because he gets paid a commission of 50-110% of the first year's premium to do so.)
8) How much does he get paid if I go to Vanguard and buy an index fund? ($0)
9) Which of two "investments" would a financially savvy physician purchase? (The index fund)
10) How do I get my money out of a whole life policy in retirement? (You borrow against the policy. Like all loans, that is tax-free but not interest free.)

Should I go on?

Go on please.

 

[The White Coat Investor]

Go on please.

I have, but I'm not going to recreate hours of work here. At risk of promoting my own website, here's what you really need to know about whole life insurance:

What You Need To Know About Whole Life Insurance

In that post I've linked to a half dozen others that go into even more detail. If you really want to spend hours on this, read the comments below the posts too. By the time you've done all that, if you still want a whole life policy, at least you'll be going in with your eyes wide open.

 

[goodoldalky]

Go on please.

Are you still really considering this?