Northwestern Mutual = Bernie Madoff?

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Jun 20, 2009 5:04 pm

Has anyone seen the returns of Northwestern Mutual? Bernie Madoff wasn't this consistent!  8% in policy dividends year after year.  In 2008 in spite of the worst financial crisis since the Great Depression they reported a 6.5% return.  My father in law (who swears by this company) claims it is because they are a mutual.  I don't believe it.  What's the catch?

Jun 20, 2009 5:15 pm

A dividend isn't a return.  Unlike Bernie Madoff, there is no reason for cooking the books. 

 
Being a mutual is very helpful.  Mutuals don't have to worry about quarter to quarter results and can do what is best long term. 
 
If I'm not mistaken, I believe that Guardian was actually able to raise their dividend this year.  I would expect all of the mutuals to have to lower them next year.
Jun 20, 2009 5:18 pm

I don't sell insurance so perhaps you can clarify it for me.  How is a dividend not a return?  If you received 8% in dividends, then didn't your cash value grow by 8%?

Jun 20, 2009 8:47 pm

Northwestern is a madoff feeder fund 

Jun 20, 2009 10:13 pm

Yes, I'm dead serious.  My father in law just showed me their returns (or rather dividends) for the last 28 years and it is between 8-10% year in and year out.  Difficult to believe.  Sure beats the heck out of American Funds.  I think I'm going to jump ship for Northwestern Mutual.

Jun 21, 2009 11:48 am
Lex123:

Yes, I'm dead serious.  My father in law just showed me their returns (or rather dividends) for the last 28 years and it is between 8-10% year in and year out.  Difficult to believe.  Sure beats the heck out of American Funds.  I think I'm going to jump ship for Northwestern Mutual.



It's a return of premium, not a dividend as with a stock.  There's a reason Northwestern's dividends are not taxable.  I'd imagine your return over time would be closer to 4-5% on a tax-free basis as long as you don't lapse the policy.  Not too shabby a rate of return, but definitely not 8-10% unless you bought UL's back in the early 80s, their illustrations showed numbers that high, unfortunately they didn't do quite so well!

Jun 21, 2009 2:00 pm

It is considered a return of premium for taxation purposes, but the dividend represents excess profits.  When a mutual company has less than expected death claims, lower than expected expenses, and/or higher than expected returns in the general account, the company returns a percentage to the policy holder.  The percentage means nothing to the individual.  Someone who takes out a WL policy will not get an 8% dividend in the first year.  Likewise, someone who's held a WL policy for 30 years+ can see their CSV grow by much more than 8% when a dividend is paid. 

 
Berkshire is right. The long term performance of WL is around 4-5% tax free.  Which is very good considering the lack of risk the policy holder takes, along with the liquidity the CSV offers.  However, the permanent death benefit is the most important feature of a WL policy.  When you can show how a client can have $0 CSV and be better off with a permanent policy than without it, you really add value. 
Jun 22, 2009 10:39 pm

Hmmmm....return of premium.  So you are saying policyowners are getting their own money back and (at least some) are fooled into thinking that they are getting high returns.  I don't mean to overstate the case, but going back to my original thesis, isn't that the definition of a Ponzi scheme?


deekay -- It's certainly hard to believe that any insurance company posted "excess profits" in 2008. 
 
Perhaps the mutual companies simply overcharge premiums so there will be policy dividends to return?
Jun 22, 2009 11:42 pm
Lex123:

Hmmmm....return of premium. So you are saying policyowners are getting their own money back and (at least some) are fooled into thinking that they are getting high returns. I don't mean to overstate the case, but going back to my original thesis, isn't that the definition of a Ponzi scheme?

deekay -- It's certainly hard to believe that any insurance company posted "excess profits" in 2008.



Perhaps the mutual companies simply overcharge premiums so there will be policy dividends to return?





It's the definition of an investor not understanding the product they purchased... it's not a Ponzi scheme.

Jun 23, 2009 6:39 am

Lex, if you are going to be a decent advisor, you have a responsibility to understand how financial products work. 


 
Because the insurance company is guaranteeing the premium and death benefit, they must charge a premium that allows them to make good on this promise.  They do this by assuming that their mortality expenses will be high, their operating expenses will be high, and their investments will perform poorly.    When this doesn't happen, the insurance company is able to pay a dividend.  The big mutual insurance companies have always been able to pay dividends.
 
Lex, a ponzi scheme pays old investors with the money from new investors.  A mutual insurance company pays its owners actual profits from the company.  Please explain how this can possibly be confused for a ponzi scheme.
 
Your problem is that you are confusing "dividend" with "rate of return".  The terms aren't synonymous.
Jun 23, 2009 8:46 am
anonymous:

Lex, if you are going to be a decent advisor, you have a responsibility to understand how financial products work. 


 
Because the insurance company is guaranteeing the premium and death benefit, they must charge a premium that allows them to make good on this promise.  They do this by assuming that their mortality expenses will be high, their operating expenses will be high, and their investments will perform poorly.    When this doesn't happen, the insurance company is able to pay a dividend.  The big mutual insurance companies have always been able to pay dividends.
 
Lex, a ponzi scheme pays old investors with the money from new investors.  A mutual insurance company pays its owners actual profits from the company.  Please explain how this can possibly be confused for a ponzi scheme.
 
Your problem is that you are confusing "dividend" with "rate of return".  The terms aren't synonymous.



If you want to get really confused, Lex, there are many large Mutual insurance companies who are non-participating and do not pay a dividend as well!

Jun 23, 2009 8:55 am

u guyz r idiauots. Lex works for a big wire (maybe even the "clear" leadur). He knows more about finanz than u. if he sez itz a ponsi skeme, thin it is.

Jun 23, 2009 11:09 am

In a nushell, there policy premiums are inflated and they return a portion of it in the form of a "dividend."  They are not paying 8% on the cash.  They cant b/c the cash they are investing on their end isnt making 8%.  Impossible.

Jun 23, 2009 7:36 pm
success:

In a nushell, there policy premiums are inflated and they return a portion of it in the form of a "dividend."  They are not paying 8% on the cash.  They cant b/c the cash they are investing on their end isnt making 8%.  Impossible.


 
A company doesn't need to make 8% on their investments to pay out 8%.   Don't forget that the insurance company is a business and they make money from this business.   They make lots of money from people who buy term insurance, disability insurance, annuities, from other businesses that they own, permanent policies that get canceled, etc.
Jun 23, 2009 8:51 pm

I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.

 
 
Jun 23, 2009 8:57 pm
Lex123:

I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.

 
 
 
deekay:

It is considered a return of premium for taxation purposes, but the dividend represents excess profits.  When a mutual company has less than expected death claims, lower than expected expenses, and/or higher than expected returns in the general account, the company returns a percentage to the policy holder.  The percentage means nothing to the individual.  Someone who takes out a WL policy will not get an 8% dividend in the first year.  Likewise, someone who's held a WL policy for 30 years+ can see their CSV grow by much more than 8% when a dividend is paid. 

Aug 5, 2009 8:10 am
Lex123:

I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.



Maybe I can help.....

Let's say, you need to refill the LP tank for your double-wide trailer home. So, you get on your horse and go down to the General Store and speak to old man Brady. But, he knows your kind, and he's not taking the trip all the way out to Cactus Hill to fill your tank unless you pay first. So you pay him $100...

Now, he's filled your tank before and he is pretty sure it's only going to cost $92, but he charges a little more just in case you might need a little more. But he comes out and thanks to good energy management (on your part), it comes to exactly $92. So Old Man Brady gives you $8 and drives away in the LP truck.

You're so excited, you crank up your phone and call your Maw to tell her you made an 8% return on your LP investment. You're disappointed when your Maw says, "You dumbass! That's not a return on investment, it's just a return on unused premium"

So you open a beer and stare at the pile of burning tires...

Aug 5, 2009 9:22 am
[email protected]:
Lex123:

I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.



Maybe I can help.....

Let's say, you need to refill the LP tank for your double-wide trailer home. So, you get on your horse and go down to the General Store and speak to old man Brady. But, he knows your kind, and he's not taking the trip all the way out to Cactus Hill to fill your tank unless you pay first. So you pay him $100...

Now, he's filled your tank before and he is pretty sure it's only going to cost $92, but he charges a little more just in case you might need a little more. But he comes out and thanks to good energy management (on your part), it comes to exactly $92. So Old Man Brady gives you $8 and drives away in the LP truck.

You're so excited, you crank up your phone and call your Maw to tell her you made an 8% return on your LP investment. You're disappointed when your Maw says, "You dumbass! That's not a return on investment, it's just a return on unused premium"

So you open a beer and stare at the pile of burning tires...




ROTFLMAO!!!!

Someone's feisty this morning

Aug 5, 2009 9:30 am
[email protected]:
Lex123:

I've already admitted that I don't sell insurance, but I am trying to learn.  If you will help me understand one more point....If the 8% policy dividend is NOT a return on your cash value then what is it a percentage of?  Are they paying back 8% of your premium dollars?  Or is it rather your cut of the excess profits so the percentage is 8% OF the total profits earned by the company.



Maybe I can help.....

Let's say, you need to refill the LP tank for your double-wide trailer home. So, you get on your horse and go down to the General Store and speak to old man Brady. But, he knows your kind, and he's not taking the trip all the way out to Cactus Hill to fill your tank unless you pay first. So you pay him $100...

Now, he's filled your tank before and he is pretty sure it's only going to cost $92, but he charges a little more just in case you might need a little more. But he comes out and thanks to good energy management (on your part), it comes to exactly $92. So Old Man Brady gives you $8 and drives away in the LP truck.

You're so excited, you crank up your phone and call your Maw to tell her you made an 8% return on your LP investment. You're disappointed when your Maw says, "You dumbass! That's not a return on investment, it's just a return on unused premium"

So you open a beer and stare at the pile of burning tires...

 
Brilliant post.
Aug 5, 2009 1:26 pm

Don't you dare ask an NML agent to explain this concept.  To them it is a rate of return, easily compared to the historical return of the S&P 500, lol.