Take a New Look at Life
71-0044 (0606) (REV 0509)
An Objective Look at Life Insurance Making decisions about your life insurance needs is not a simple process. Coming to conclusions about how much and what type of life insurance you should own can only be made after you complete an analysis of your financial needs, and give careful consideration to all the product options that are available to you. But how do you unravel all of the information you have and make the decision that is right for you? Cookie cutter answers are rarely appropriate in complex situations, where lives are as different as ours. We ought to consider the length of time we need the insurance and balance the cost against the value. Because there are conflicting opinions about the relative value of the different kinds of life insurance, the one thing each of us can fall back on is our individual needs.
Understanding the Basics of Term Insurance Term insurance, as the name implies provides coverage for a limited period of time. Your beneficiaries will usually receive the proceeds income-tax free if you die during the term, as long as all the premiums have been paid. Generally there are two types of term policies: annually renewable term and level premium term. Annually renewable term has premiums that start out lower than level term premiums, and they increase each year the policy is in force. Level premium term usually has premiums that initially are higher than annually renewable term, but they remain level perhaps for 10 or 20 years, at which point the contract terminates. A new policy can be applied for at a higher premium, though there is no guarantee that you will continue to qualify for one.
Term insurance works best when the need for insurance is temporary and when you need a large amount of coverage for the smallest amount of money. The lower initial premiums allow you to buy higher levels of coverage at younger ages, when the need for protection is often the greatest. Term insurance does have its disadvantages, however. If the coverage ends, a subsequent policy will cost more than the first one. In time, owning a term policy can become more costly than owning a permanent one, and may even become too costly to continue. Most term insurance policies contain no cash value. Northwestern Mutual Life Insurance Company (Northwestern Mutual) has term policies that have the potential to earn modest dividends. They also provide you with a time frame during which you can convert to a permanent policy – one that is guaranteed to last for your entire lifetime at a guaranteed level premium.
Understanding the Basics of Permanent Insurance Permanent insurance (whole life, for example) provides protection for your entire lifetime in most cases. No matter when you die, as long as your premiums are paid, your beneficiaries will generally receive the proceeds incometax free. Since this kind of insurance is intended to meet long-term needs, it has level premiums and a cash value that grows tax-deferred. Northwestern Mutual’s permanent life insurance policies are eligible for annual dividends which can be added to your cash value and also grow tax-deferred. Alternatively, these dividends can be used to reduce your out-of-pocket premium payments or to increase your total death benefit. (This keeps your coverage growing as your needs increase, without increasing your premium.)
Permanent insurance works best when the need for insurance is long-term. With a death benefit that is guaranteed not to decrease and a premium that is guaranteed not to increase, whole life insurance can be less costly than a series of term policies. Of course, a permanent contract has a higher initial premium. But, that premium is contributing to the growth of the cash value – a cash value that can be accessed much the same way you could access the equity in your home, to help pay for college or to supplement a retirement income. A smaller death benefit will exist until the loan is repaid. Permanent policies are flexible contracts, giving you a series of options that can be changed as your situation changes. At some point in the future you might even be able to choose to stop paying the premiums and take a policy that is fully paid up. The bottom line? Permanent life insurance allows you to stay in control.
Which Kind of Life Insurance Should You Own? These two types of life insurance can work well together or separately. The solution that is best for you depends on your situation. · You need protection for a short period of time, say the four years your child is in college. (Term) · You want protection that lasts as long as you need it to, perhaps a lifetime. (Permanent) · You want to help ensure that your children or grandchildren can attend the college of their choice – whether you live or die. (Permanent) · You need protection, but you have a lot of demands on your financial resources. (Term) · You need to accumulate money to supplement your retirement income. (Permanent) · You want to provide for a child with special needs. (Permanent)
· You want to protect the lifestyle your income provides for your family. If two incomes are involved, you should protect both of them. (Term or Permanent) · You need to replace the financial contribution of a non-working spouse. (Term or Permanent) · You want to provide an inheritance for the people or organizations you care about. (Permanent) · Your bank wants you to own life insurance in order to loan you money to expand your business. (Term) · You want to help your employees save for retirement. (Permanent)
Dividends When actuaries price a life insurance contract, they take into account not only the age to which people can be expected to live but also the expenses the company might incur and the investment return it can expect to earn. To the extent that more of the insureds live longer than expected, or the investment return is greater than anticipated, or the company expenses are lower than it anticipated, a surplus is generated. Some of this surplus is set aside by the company for those years when things may not go as well. Some of it may be distributed to policyowners in the form of a dividend.
Some insurance companies have stockholders who, in return for their investment in the company, receive some of the profits when things go well. Mutual insurance companies, on the other hand, have no stockholders. They strive to provide insurance at cost, and if a surplus is generated it is returned to policyowners. All other things being equal, mutual company policyholders generally can expect to receive larger dividends than those people who own policies with stock companies. Neither kind of company ever guarantees its dividends. Northwestern Mutual has, however, paid a dividend each year since 1872.
The Long-Term Value of Dividends Procrastination is more than a thief of time. When it comes to life insurance and other investments, it is also a thief of opportunity. Dollar for dollar, a whole life policy purchased today is likely to provide more value than a similar policy purchased in the future. The chart on the opposite page compares actual results for two 65-year-old men (and women) who purchased $250,000 Northwestern Mutual life insurance policies 10 years apart. In both situations, the individuals owning the policies for 30 years ended up with more cash value and more death benefit at age 65. In the case of the men, the individual who bought his policy earlier paid $30,000 more in premiums than the man who postponed his decision, but had a death benefit that was over $400,000 more than this man, and almost $300,000 more in cash value. The woman who purchased earlier experienced similar advantages with the death benefit, and more than $300,000 in cash value.
When it comes to using their dividends, policyowners have several choices: take them in cash; use them to reduce their premium; or use them to increase policy values. The latter choice is reflected in the chart below. The Effects of Time on a $250,000 Whole Life Policy Values at Age 65 Policy Purchased by ‌
Annual Premium
Premiums Paid
Guaranteed Cash Value
Total Cash Value
Total Death Benefit
35-Year-Old Male1
$4,887.50
$146,625
$121,658
$486,031
$828,922
45-Year-Old Male
$5,815.00
$116,300
$99,878
$206,326
$426,529
35-Year-Old Female1
$4,577.50
$137,325
$121,658
$487,574
$831,374
45-Year-Old Female2
$4,692.50
$93,850
$86,188
$166,869
$401,370
2
These values represent the actual results at age 65. No loans were taken on these policies. Since the economic conditions going forward will be different from those in the past, the results 20 or 30 years from now for policies bought today will be different. 1 2
Policy issued in 1979. Policy issued in 1989.
Why Northwestern Mutual? Contrary to what you may have heard, not all insurance companies are alike. In fact, today there are about 1,000 life insurance companies to choose from. Some provide low-priced term insurance; others also offer low-cost permanent insurance. Some have stockholders looking for their return on investment; others provide returns only to policyowners. Some companies receive the best possible insurance financial strength ratings; some receive lower ratings. Some compete on price; others offer additional benefits and provide long-term value. To help you determine which type of company you’d like to do business with, you might consider the following factors.
Ratings Third-party ratings provide an independent assessment of a company’s financial strength and security relative to other companies within the insurance industry. When you purchase a life insurance contract, you are, in effect, purchasing a promise – the insurer’s promise to pay claims and meet obligations years into the future – a promise Northwestern Mutual has been keeping for 152 years. We are one of only three insurance companies to receive the highest possible rating from each of the four major rating services in 2008. In fact, Northwestern Mutual has never received a rating other than the highest possible from any of these agencies.
Aaa
Moody’s Investors Service
AAA
Standard & Poor’s®
AAA
Fitch Ratings
A++
A.M. Best
Rankings If you measure the products you own by the value they provide, we can withstand the closest scrutiny. Value is based on what you get for what you pay, and at Northwestern Mutual, you receive multiple benefits, built around a dividend-paying philosophy that is the best in the business. According to the 2008 A.M. Best Insurance Reports, Northwestern Mutual ranks first in total dividends paid to its policyowners – not something you might ordinarily expect from a company that is far from being the largest company.
Perhaps this history of delivering value is the reason Northwestern Mutual is so highly regarded by experts within the industry. Northwestern Mutual achieved the longest record at number one in any industry in the history of FORTUNE® magazine’s “most admired” survey, after leading the life insurance industry for 25 years.
Reputation No measure of a company is more important than the measure of satisfaction expressed by its customers. To ensure that it stays in tune with its customers, each year since 1875, a group of Northwestern Mutual policyowners have been invited to examine the workings of the company and to complete a report which is published, unedited, in the company’s annual report.
The 2008 Policyowner Examining Committee report concluded: “The times in which Northwestern Mutual is operating can be characterized as turbulent, challenging and even chaotic. The competitive landscape is rapidly being reshaped. We certainly believe future generations will look back on 2008 and 2009 as historic in many ways. We felt reassured as policyowners that our trust in the Company is being honored by continued strong performance and a solid strategic plan for the future.”
As if to echo this sentiment, nearly half of the policies bought from the Northwestern Mutual in 2008 were bought by existing policyowners … satisfied customers coming back for more. This kind of loyalty doesn’t come by chance. It is a response to a record of accomplishment that is built on a philosophy of putting the policyowner first.
The Northwestern Mutual Way The ambition of The Northwestern has been less to be large than to be safe; its aim is to rank first in benefits to policyowners rather than first in size. Valuing quality above quantity, it has preferred to secure its business under certain salutary restrictions and limitations rather than to write a much larger business at the possible sacrifice of those valuable points which have made The Northwestern pre-eminently the policyowner’s Company. Executive Committee, 1888
The Northwestern Mutual Life Insurance Company • Milwaukee, WI www.northwesternmutual.com 71-0044 (0606) (REV 0509)