Finding the Right Whole Life Insurance Company – Episode 117

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler, and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we’ve got bestselling financial author Kim Butler with us today. I’m going to be talking about the subject of how to choose a life insurance company. And I’m sure most people don’t buy a lot of life insurance from a lot of different companies. So when you make that decision, this is a pretty critical thing, isn’t it, Kim? It is, particularly if you’re going to buy whole life and the whole idea behind whole life

[00:51] is to have it for your whole life, W-H-O-L-E, all of your life. So it’s definitely a decision that you want to think about carefully. And yet people, I think, focus on the wrong things. And so that’s why we’re going to talk about this today, because I want to help people understand that when it comes to whole life, the actual company choice is not as critical as they would guess. So give me some questions that you think people would typically ask around this arena. I think that people make this particular decision based upon a relationship. So sort of like buying a car, they find a car salesman that they like and they go with that person’s recommendation rather than asking the right questions up front,

[01:42] assuming that they’re all the same or that the agent will automatically pick what the best choice is. Well, and that is where the other issue comes in about potentially picking an agent. So that, too, is a really critical thing that we’re going to talk about. But let’s stay focused on the company for a moment, because one of the biggest mistakes that people make is spending way too much time on picking whole life or mutual life insurance company A over whole life or mutual insurance company B. So let’s talk about this from a mutual standpoint. Let’s acknowledge that right away we’re talking about mutual companies, not stock companies, and then be clear that mutual company A versus mutual company B is not the right thing to focus on.

[02:35] And if we just step back about this, we can realize that the time this product has been around, which is 150 to 200 years, depending on the company, is going to what’s the saying? Rising tide or rising tide floats all boats or something like that. That’s exactly right. Kim, if you would, just there may be some new listeners on here that might just need a little bit better understanding of mutual versus stock companies. Absolutely. So a mutual life insurance company is owned by the policyholders only. So somebody that buys a life insurance policy from company A is going to be an owner of company A, and that’s called a mutual company. And then there are also life insurance companies that are stock companies.

[03:26] And these companies provide life insurance, but they’re owned by stockholders, and that may be in addition to, could sometimes be instead of, it depends, the policyholders. And then there’s a hybrid company called a mutual holding company. So setting that aside for the moment, just to keep things clear, the stock companies must pay attention and money in the form of dividends to their stockholders. And then the policyholders are often second, whereas a mutual company, the policyholders, the policy owners, those terms are interchangeable, are the only ones that matter. And so the policyholders are getting the dividends, and that’s a critical distinction. And that’s at the company level, not the product level.

[04:24] It’s a mutual company or it’s a stock company. Now, at the product level, both types of companies can offer what’s called participating whole life insurance. Participating just means dividend paying. But as a general rule of thumb, we want to look at a mutual company to provide that participating whole life product because the mutual company, as I indicated, are only going to pay dividends to the policyholders. Whereas the stock company’s got a split focus. So dividends are what make a policy participating. And it’s literal that you’re participating in the wealth of the company and the profit of the company. And by law, a mutual life insurance company must pay all of its profits to the policyholders.

[05:21] Now, of course, they reserve some and they have their expenses and everything else, but profits mean profits. It is a law by a mutual company to pay all of its profits to its policyholders. So just to kind of summarize, we’re buying life insurance, first of all, as a protection in the event of our death. Secondly, there is a cash value inside there that works similar to a bank account and earns a rate of return. And third of all, we look at the profitability of these insurance companies. And I know some of the companies that you prefer to use are not required to pay dividends unless there’s a profit. But yet they’ve managed to make that profit for 100 consecutive years. That’s pretty impressive.

[06:09] Absolutely. And it is such a great place to store cash that people are starting to really learn about these companies again, even though they’ve been around for so long and even though this product has been around for so long. And quite frankly, it’s a very boring product. And this is where I want to help our listeners is to get clear that as long as you’re in the mutual company camp. So we’re talking Guardian, MassMutual, New York Life, Northwestern Mutual, Penn Mutual, Ohio National, America United, Lafayette, Mutual Trust. I mean, I could probably rattle off a few more. Those are the ones that come to the top of my mind. Those are all mutual life insurance companies. Now, let’s be clear that the company doesn’t always have the name mutual

[07:00] or the word mutual in the name. And then to further confuse things, there are some companies, Liberty Mutual is one that comes to mind, that used to be a mutual company and have converted to a stock company, but still maintain the word mutual in their name. So when you are starting this out, you just want to make sure you have a mutual company. But then here’s where the critical point is. Once you know you’ve picked a mutual company, it really doesn’t matter which company you use as long as they’re mutual. And this is where people get hung up and they want to spend so much time analyzing mutual company A over mutual company B or whole life product A from either mutual company A or B or even whole life product A or whole life B from the same company.

[08:07] And that’s where the time, in my opinion, gets wasted because you’ve got all this effort spent on trying to figure out whether it’s a mutual company A or B that you should be doing business with. And frankly, you could throw a dart and whichever one the dart landed on, frankly, you could throw the dart blindfolded and whichever one it landed on, you would be just fine. I think that a lot of people also are going to ask the question, what about these ratings and letters and numbers that are assigned to companies? What do they mean and how important are they? Oh, that’s a great question. So ratings can be important. I mean, they’re clearly just a group’s opinion about a particular company. But most of the mutual companies are highly rated.

[08:57] I don’t think it’s necessary that the ratings be in the top, top, top category. So for example, you have a rating from Duff and Phelps, from Moody’s, from Standard and Poor’s. You have ratings from A and Best, from Weiss Research. And you clearly want to be in the top one or two categories amongst those various rating agencies. But size dictates a lot. And so the really, really large mutual companies are going to be in the higher rated categories when the smaller mutual companies might be in the second or possibly even third category. And they’re equally as strong. So I don’t put a lot of faith in the ratings. I mean, clearly you don’t want some unheard of low rated company. But most of the ones that we’ve been talking about

[09:52] have been around over 150 years or at least over 100 years and are in the top one, two, maybe three categories for rating agency opinions. And then again, that’s as far as you need to go. Just get a mutual company. Have it be in the top 20 of the companies or so. And then move on to some other areas to do your research in because whether it’s company A or company B, as long as it’s mutual, it is not going to matter. And we’ve done research on this numerous times, comparing and contrasting policies from different companies. And over time, they are going to be the same. Now this is really critical, the over time part, because as an example, if you pull a particular illustration from company A today and you compare it to company B today,

[10:50] there’s good likelihood that company A is going to look a lot better today. But if you pull those same two companies in five years, there’s a very strong likelihood that company B is going to look better at that point in time. And this is the game that these insurance companies play with their illustrations. So an illustration is a 10 to 12 to maybe even 20 page document that you get and right at the top of the document, it’s going to say based on the 2016 dividend scale. So a particular insurance company is going to illustrate aggressively, we call it. In other words, they’re going to have a very high dividend for the year 2016. Whereas company B is illustrating conservatively. They’re going to have a low dividend for the year 2016.

[11:46] And again, I promise you five years ago, it was the other way around where B was higher than A. And 10 years ago, A was probably higher than B again. So they just tend to go in this cycle of every three, four, five, six years, one company’s rising above the others on the illustration. But that illustration is just for the year 2016. So when you look at these policies over a longer period of time, which is a 30 year timeframe, that’s a pretty good thing to look at is a 30 year timeframe for a whole life policy. When you analyze a life insurance illustration over 30 years, they are all much, much closer on their illustrations, even though in the short term, they might have one be much stronger and appear much stronger than the others.

[12:39] In the long term, they’re all fairly equal. Awesome. Makes a ton of sense. And it does take a lot of the workout. Now, the question I have to ask next would be not about rating the company, but how about how the company rates me? In other words, is there a company that might give you preferred where another company would rate you as standard? Is it worth shopping that way? That is an excellent question. All life insurance companies use something called the Medical Information Bureau, MIB, and it’s very much like your credit rating at the credit bureaus, but this is, I guess you could call it your health rating at the medical bureaus. And so it’s pretty rare that one particular company, especially of the top 20 mutual companies as an example,

[13:30] would give you very much of a different rating than another. Now, there’s some exceptions to this. If you have some serious medical issues, if you’re on quite a few different medications, if you’ve got a history of cancer or heart disease, if your family has a history of cancer or heart disease, and again, especially if you are already showing signs and are being medicated for various things, then absolutely it can make a difference. And I know we’ve talked about this on the podcast before, but if you are really concerned about that issue, it’s helpful to bring it up first, because a good advisor can direct you to either a company that he or she knows can help with that particular set of medical information,

[14:25] or they can take you to a shopping service. And there are a variety of shopping services out there that provide the ability to get you approved on what’s called an informal basis, meaning they’re going to take a look at you without your name attached to you. And they’re basically just looking at your medical information and getting you approved that way. So in that instance, yes, company might matter a little bit more, but otherwise it does not, again, because of the long-term nature, if you do these studies of insurance companies as we have for years and years and years and years, and you look at a policy long-term, it is not going to matter which policy you pick. In fact, if I have a client that’s really struggling with it,

[15:15] I’ll have them pick both. There’s nothing that says it has to be one or the other. If you’re concerned, do one on yourself and a different company on your spouse, or do two smaller policies, one on yourself with one company and one on yourself with another company. There is often a misunderstanding that people only have one life insurance policy, and that’s not accurate at all. Many, many people have numerous policies because they’ve bought them over time. As their income has increased, they bought more and more policies. So it’s also very possible to have five or six or seven different policies with five or six or seven different companies. Awesome. And I think this would be an appropriate time

[16:01] for you to mention the book, Live Your Life Insurance. I’m sure we’re bringing up a lot of stuff that’s going to make people think and have more questions. I think that would be a great resource to refer people to at this point. Absolutely. So we wrote a book about 10 years ago, I want to say, called Live Your Life Insurance. There’s actually a second version available now on Amazon, and our clients tell us that this is the best owner’s manual that they’ve ever read. Wouldn’t it be awesome when before you buy something, you got to actually read the owner’s manual or the user’s manual of that product. And that’s what that book was designed to do, is help our clients learn how to use their life insurance

[16:43] or live with it or use it while they’re living. Hence the title, Live Your Life Insurance. So it’s a very small book, quick read. I mean, right to the point. Yep. Blunt and direct, just the way that I like it. So yes, please help yourself to that on Amazon. And if you have questions of us, send them in. The email is hello at partners, number four, prosperity.com. And we are more than happy to handle any questions that get sent in there to the podcast so that you can get your answers. No matter how specific or generic they are, we will tackle them. Super. Well, we’re running a little long today, but is there anything else you want to add in about choosing a life insurance company before we wrap up?

[17:28] Let’s end it at that and stay tuned for the next edition, which we’ll talk about choosing the life insurance agent. Super. Once again, thanks to all our listeners and thanks to Kim Butler. A lot of good information today and keep those questions coming. Take care, everybody. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.