Northwestern has just announced that they will reduce dividends from 5.45% to 5%. That is a major drop. It impacts not only new business but in-force business, including policies sold years ago. And, for reasons I’ll explain, the other mutual carriers (think Mass Mutual and New York Life, among others) are likely to follow suit in the next few months.
It’s time to review your policy.
When you bought your life insurance policy, you probably looked at a performance estimate based on the dividend rate at the time. If you have a Northwestern policy, the actual rate is now lower than the one used in that estimate, which means your policy is not going to perform as planned—that means less cash value or less time before your policy lapses.
I’m not trying to pick on Northwestern. They are a good company that contributes greatly to the life insurance industry. They have good product offerings and many good advisors. The fact of the matter is that, as of this writing, the 10 Year Treasury is at 1.778%. That’s incredibly low. We remember when this number was in the mid-twos, and it was low then. And that matters because life insurance carriers model their life insurance portfolio using this number. When the number is lower than expected, they lose money. Eventually, they have to cut rates to protect themselves. Northwestern did it first, but the others are likely to follow. And who knows where this rate will go from here.
This kind of change happens regularly in the insurance industry. Something is always shifting. That’s one reason why it’s always a bad idea to just buy life insurance and forget about it. The other reason to review is that your needs can change. It’s important to review your policy every so often to make sure that it still offers you a good deal. And when you update the design of your policy, don’t just run it at the current rate–project out what will happen if rates go down even further. Change is inevitable, and you need to keep that in mind in your planning.
The other thing that’s important to look at is flexibility. Life insurance policies sometimes carry restrictions and some carriers and products restrict you more than others. Whole Life, which is the main product that Northwestern sells, tends to have more restrictions. That doesn’t make it bad; it’s just something to keep in mind. But you need to make sure you understand the restrictions in your product so you know what your options will be when rates fluctuate. And rates will fluctuate.
This all may seem complicated—and it can be. There’s a reason why jobs like mine exist, to help consumers sort out all the options. But you only really need to understand your own policy, and that is much simpler and straight-forward. If you do a basic review of your insurance regularly and keep up to date with the major news in the industry, you give yourself a better chance for success with your insurance plans. If nothing else, this news from Northwestern should be a reminder to review your life insurance policy, no matter which carrier the policy is with.