Northwestern Mutual Vs Ohio National - Whole Life Insurance

[BNTRS]

With regard to direct vs non-direct recognition, I was told that while with non-direct recognition I can take a loan out on my policy, but will still be payed a dividend on the entire amount. I was told that with direct recognition (like NWM) it allows to company to ultimately pay higher dividends.

If that is the case, is there any way of figuring out about how much more a direct recognition company could pay?

Additionally, with a non-direct recognition company, when I take out a loan on my cash value, what is a common interest rate will I typically have to pay out of my own money?
The NWM agent said that with NWM all loans are taken out at an 8% interest rate, then they credit you back 7.5%, so ultimately I am paying 0.5% to take a loan out on my own money. How does this usually work with a non-direct recognition company?

The current loan interest rate at ONL is 4.40% and is variable tied to the Moody's Corporate Bond Index (this is standard among variable rate carriers).

So, the policy loan will have interest due of 4.40% per year while paying the declared dividend rate on the portion of the policy that is pledged as collateral for the loan, currently 6.15%.

As you've noted Northwestern uses direct recognition which allows NML to adjust the dividend. Currently the fixed loan rate at NML is higher than the dividend interest rate and they pay a higher dividend rate on portions pledged as collateral for a loan. They contractually guarantee it to be a 50bps below the loan interest rate. They will pay their regular dividend rate on non pledged portions, currently 5.60%

If NML had a dividend interest rate that was higher than 8%, this would cause direct recognition to lower the dividends paid on portions pledged as collateral for a loan.

Do not make the assumption that ONL's 615% dividend interest rate is better than NML's 5.60% dividend interest rate.

This rate is paid off the policy reserve, it's similar to the cash surrender value, but not necessarily the same.

 

[bsebllsnwbrdng1]

The current loan interest rate at ONL is 4.40% and is variable tied to the Moody's Corporate Bond Index (this is standard among variable rate carriers).

So, the policy loan will have interest due of 4.40% per year while paying the declared dividend rate on the portion of the policy that is pledged as collateral for the loan, currently 6.15%.

As you've noted Northwestern uses direct recognition which allows NML to adjust the dividend. Currently the fixed loan rate at NML is higher than the dividend interest rate and they pay a higher dividend rate on portions pledged as collateral for a loan. They contractually guarantee it to be a 50bps below the loan interest rate. They will pay their regular dividend rate on non pledged portions, currently 5.60%

If NML had a dividend interest rate that was higher than 8%, this would cause direct recognition to lower the dividends paid on portions pledged as collateral for a loan.

Do not make the assumption that ONL's 615% dividend interest rate is better than NML's 5.60% dividend interest rate.

This rate is paid off the policy reserve, it's similar to the cash surrender value, but not necessarily the same.

I'm not sure I understand the difference between the 'loan interest rate' and the 'dividend interest rate'.

If I take out a 1000$ policy loan, how much interest (or what interest rate) will I have to pay to ONFS? Assuming the loan interest rate is at 4.4%

 

[BNTRS]

I'm not sure I understand the difference between the 'loan interest rate' and the 'dividend interest rate'.

If I take out a 1000$ policy loan, how much interest (or what interest rate) will I have to pay to ONFS? Assuming the loan interest rate is at 4.4%

Loan interest rate is the interest that you pay on policy loans based off the loans current principal.

Dividend interest rate is the rate the insurance company pays you in dividends, and is based off the policy reserve.

So if you take a loan from an ONL policy currently you'll pay them 4.40% interest per year to ONL.

In your example, you'd pay $44 in interest on the loan in the first year assuming no repayment of principal.

 

[scagnt83]

NWM:
Pays you 5.6% in Dividends.

They pay you 7.5% on any CV that is used for a Loan.
But they charge you 8% in interest charges on the CV used for a Loan.

So you have a -0.50% loss on CV that is Loaned out.



ON:
Pays you 6.15% Dividends.

They pay you 6.15% on the Loaned amount as well.
They charge 4.4% on the Loaned amount.

So your Loaned CV is still being credited a POSITIVE 1.75% inside your policy.

Instead of being an ongoing cost to your policy, Loaned CV is an ongoing gain to your policy with ON.

This is the big deal between Direct Recognition (NWM) and Indirect Recognition (ON).

 

[Full Throttle]

My independant agent (suggesting ONFS) is in her 40s and a VERY close family friend that I really trust and respect.

The NWM agent is in his 20s, same age as me (24 years old). I have met with him 3 times and he seems very knowledgable and trustworthy. He pointed out that my other agent will be retiring 'soon', and he will be around much longer.
Additionally he pointed out that he can sell any product, whereas my other agent cannot sell NWM products.

My independant agent worked for NWM for several years in the late 90s and is confident that the ONFS product will perform as good as the NWM.

My wife is not comfortable with the NWM agent simply because we do not know him as well.

Tell your NML agent you like him better, but like the ON policy better and you would like him to sell it to you? $1,000 says he does not sell you an ON policy, because he can not do so.

 

[Chuckles21]

NWM:
Pays you 5.6% in Dividends.

They pay you 7.5% on any CV that is used for a Loan.
But they charge you 8% in interest charges on the CV used for a Loan.

So you have a -0.50% loss on CV that is Loaned out.



ON:
Pays you 6.15% Dividends.



They pay you 6.15% on the Loaned amount as well.
They charge 4.4% on the Loaned amount.

So your Loaned CV is still being credited a POSITIVE 1.75% inside your policy.

Instead of being an ongoing cost to your policy, Loaned CV is an ongoing gain to your policy with ON.

This is the big deal between Direct Recognition (NWM) and Indirect Recognition (ON).

Don't forget how Mortality and Expenses work towards a dividend. The dividend interest rate is only 1 of 3 things that goes towards the dividend growth.

 

[bsebllsnwbrdng1]

NWM:
Pays you 5.6% in Dividends.

They pay you 7.5% on any CV that is used for a Loan.
But they charge you 8% in interest charges on the CV used for a Loan.

So you have a -0.50% loss on CV that is Loaned out.



ON:
Pays you 6.15% Dividends.

They pay you 6.15% on the Loaned amount as well.
They charge 4.4% on the Loaned amount.

So your Loaned CV is still being credited a POSITIVE 1.75% inside your policy.

Instead of being an ongoing cost to your policy, Loaned CV is an ongoing gain to your policy with ON.

This is the big deal between Direct Recognition (NWM) and Indirect Recognition (ON).

So....
Currently on CV that is loaned out NML will take 0.5% and with ONL it will continue to earn 1.75%.

On the CV that is NOT loaned out it will earn 5.6% with NML and 6.15% with ONL.

Based just on these numbers, ONL seems like a way better deal. I thought that since NML is direct recognition that, that allowed them to pay a higher dividend??

Where do the 6.15% and 5.6% interest rates come from? What am I missing?
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Don't forget how Mortality and Expenses work towards a dividend. The dividend interest rate is only 1 of 3 things that goes towards the dividend growth.

So the total dividend that is payed is based on 1. The dividend rate 2. Mortality (how much death benefit the company is paying out) and 3. Expenses....Which are all continually changing based on the companies performance.

 

[scagnt83]

So....
Currently on CV that is loaned out NML will take 0.5% and with ONL it will continue to earn 1.75%.

Correct.

You are still making 1.75% on money that you have loaned out and spent already with ON.





On the CV that is NOT loaned out it will earn 5.6% with NML and 6.15% with ONL.

Where do the 6.15% and 5.6% interest rates come from?

Those are the Dividend Rates that each company is currently paying.

The Dividend Rate creates gains to the CV based on something called the Policy Reserve.
The Policy Reserve is an internal calculation that is close to the CV but not exact.

But for lack of a better word and to simplify, the Dividend Rate is the rate credited to your policy.

The actual Rate of Return will be slightly less than the actual Dividend Rate, because part of that helps to boost the DB along with the CV.






Based just on these numbers, ONL seems like a way better deal. I thought that since NML is direct recognition that, that allowed them to pay a higher dividend??

Well... they are higher than some... so its not a totally untrue statement..

Historically, NWM has always been among some of the highest paying Dividend Rates on the market. Some years they have the highest, other years they dont.

The Dividend Rate will fluctuate. You cant control if they are higher one year vs. another.
What will not fluctuate is how much that company charges to access your money (Loan charges and Direct or Non-Direct Recognition).






What am I missing?

Not much.
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So the total dividend that is payed is based on 1. The dividend rate 2. Mortality (how much death benefit the company is paying out) and 3. Expenses....Which are all continually changing based on the companies performance.

No.

The Dividend payed is based on the companies yearly performance. This is the variable from year to year.

How it effects the policy and CV growth is effected by two things:
1: Mortality charges (Cost of Insurance (COI))
2: Expenses

Each company will have a different "cost" associated with it.



Basically the comparison breaks down like this:

- You have a certain amount to contribute per year.

- When the agent maxes out the ON policy you will have X amount of CV at age 60 (or whatever age you care about).

- Whatever year you think you will start to need to access the CV, you should have the agent show distributions similar to how you plan to access the CV.

Ex: If you need to supplement retirement around age 60 or 65, then show an income stream from that age until age 100.

- Compare the distributions (have them do all loans) between the two. This is a representation of what you will be able to "get your hands on".


But I can tell you right now that I have seen NWM illustrations with the same premium and higher CV; but the maximum loans available where higher with ON and a slightly lesser CV. I have seen this scenario multiple times. Plenty of others on here have too.


The young agent is just repeating what he is being told by trainers and managers.
Is he doing harm? No.
Is he unaware of better options? Most certainly yes!! (I have been that agent before)

 

[Chuckles21]

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No.

The Dividend payed is based on the companies yearly performance. This is the variable from year to year.

How it effects the policy and CV growth is effected by two things:
1: Mortality charges (Cost of Insurance (COI))
2: Expenses

Each company will have a different "cost" associated with it.



Basically the comparison breaks down like this:

- You have a certain amount to contribute per year.

- When the agent maxes out the ON policy you will have X amount of CV at age 60 (or whatever age you care about).

- Whatever year you think you will start to need to access the CV, you should have the agent show distributions similar to how you plan to access the CV.

Ex: If you need to supplement retirement around age 60 or 65, then show an income stream from that age until age 100.

- Compare the distributions (have them do all loans) between the two. This is a representation of what you will be able to "get your hands on".


But I can tell you right now that I have seen NWM illustrations with the same premium and higher CV; but the maximum loans available where higher with ON and a slightly lesser CV. I have seen this scenario multiple times. Plenty of others on here have too.


The young agent is just repeating what he is being told by trainers and managers.
Is he doing harm? No.
Is he unaware of better options? Most certainly yes!! (I have been that agent before)

I agree that no matter who you go with you are not doing bad. Both companies are very good and will work very good for you. One thing I will say about NML and all the comparisons these guys are referring to are that they are all based on NML's 8% fixed loan interest rate. What they don't know or just don't analyze is that you have the choice of taking a variable loan from NML same as ON. I don't know how much you are looking to fund this with but I just did a simple 24 year old male comparison for two NML policies that started distributions at age 75 through 95. With the 8% rate they illustrated $55,000 per year. With the variable rate they illustrated $71,000 per year. That is a good bit of difference by just choosing one option over the other.

Not sure if ON has a fixed rate option but another thing to think about is that with NML you can choose between fixed or variable when you actually decide to take the funds. You are not looking to access this cash for probably 30+ years. Absolutely no one can tell you what interest rates will be at that time. Say they are hyper inflated though and all of a sudden your variable rate is sitting at 11%, sure would be nice to have the option to have a 8% fixed. Of course if interest rates are that high dividends would rise as well but just some food for thought.

Give me some #'s you are thinking about funding the policy with per year and i can tell you how much changing that rate from 8% fixed to variable would make for your case.

 

[bsebllsnwbrdng1]

I agree that no matter who you go with you are not doing bad. Both companies are very good and will work very good for you. One thing I will say about NML and all the comparisons these guys are referring to are that they are all based on NML's 8% fixed loan interest rate. What they don't know or just don't analyze is that you have the choice of taking a variable loan from NML same as ON. I don't know how much you are looking to fund this with but I just did a simple 24 year old male comparison for two NML policies that started distributions at age 75 through 95. With the 8% rate they illustrated $55,000 per year. With the variable rate they illustrated $71,000 per year. That is a good bit of difference by just choosing one option over the other.

Not sure if ON has a fixed rate option but another thing to think about is that with NML you can choose between fixed or variable when you actually decide to take the funds. You are not looking to access this cash for probably 30+ years. Absolutely no one can tell you what interest rates will be at that time. Say they are hyper inflated though and all of a sudden your variable rate is sitting at 11%, sure would be nice to have the option to have a 8% fixed. Of course if interest rates are that high dividends would rise as well but just some food for thought.

Give me some #'s you are thinking about funding the policy with per year and i can tell you how much changing that rate from 8% fixed to variable would make for your case.

Ironically, the NML agent mentioned that he could offer a variable rate, but said he would never recommend it to a client. He compared it to a mortgage interest rate...as one would want to keep a known fixed rate rather than get a variable rate.

I would like to be funding it at +/-$12,000/yr within 5 years.