When buying a life insurance policy, you buy it either from a mutual life insurance company, or from a stock life insurance company.
There are several differences between these types of companies which can have implications for your results, which is what this article will explore.
What is a Stock Life Insurance Company?
A stock life insurance company is, quite similar to most companies we interact with on a daily basis, a company that is owned by investors and operators who have bought the company stock.
With stock life insurers, dividends that are paid out from the profits that are generated by the business are distributed to the shareholders - not the policyholders.
What is a Mutual Life Insurance Company?
A mutual life insurance company is in contrast to the stock company not owned by external stock investors, but by its customers who own a qualified policy issued by the company.
With mutual life insurers, dividends that are paid out from the profits are distributed to the policyholders - as they are the owners, and there is no stock for external investors to own.
The Philosophical Difference Between Mutual and Stock Insurers
In general, mutual insurance companies are more conservative in how they do business, and take less risk.
One reason for this is that with mutuals, their owners - the policyholders - are by design ultra long-term, since they buy their policy with the intention of holding it for life. The owners of stock life insurance companies, on the other hand, generally hold onto shares for a shorter time.
A second reason for the difference in risk appetite is that while stock insurance companies can raise capital in a squeeze by issuing new shares of stock, this is not an alternative for mutual insurance companies.
Furthermore, while the valuation of stock insurers can be affected by what investors think about their last quarterly report, the valuation of the mutual insurer is more based on tangible financial values.
This factor of market pressure trickles down to affect the managing executives at stock insurers. They are usually, like most stock company executives, partly compensated with stock options, where they have an incentive to increase the value of the company as quickly as possible.
Executives at mutual insurers, on the other hand, are never compensated with stock options - as there are no stocks, but only policyholders - and so have less of a personal motive in taking excessive risk to boost short-term results.
While the primary purpose of the executives at the mutual insurer is to provide value for their customers, the policyholders, the primary purpose of the executives at the stock insurer is to provide value for their shareholders.
In essence, the traditional stock market that stock insurers act within embodies more short-term thinking, which incentivices more risk-taking, while the mutual company structure embodies more long-term thinking, which incentivises less risk-taking.
Practical Differences for Policyholders
While mutual life companies generally focus on whole life insurance, stock life companies generally focus on universal life products like indexed or variable life insurance.
In general, universal life products carry more risk, and less guarantees, while whole life products carry less risk, and more guarantees.
With whole life, policyholders are generally guaranteed a minimum yearly dividend of 2-4 %, and a premium that is guaranteed to stay the same over time.
With universal policies, there is generally no minimum yearly dividend (or a 0 % guarantee with indexed products), and premiums are not guaranteed to stay the same over time.
While a good year in the financial markets can generate better returns within a universal policy than a whole life policy, the whole life policy will provide stable returns also through years when the financial markets are in a crisis.
While you can generally pay less for a certain amount of death benefit coverage within a universal life policy than a whole life policy, the amount you pay can increase (sometimes drastically) in the future.
In fact, it is not uncommon that stock companies tweak different levers on universal policies to increase the premiums for policyholders, especially when they are bought by private equity companies.
With whole life policies, the cash value that is built up within the policy creates dividends for you by being used in the company’s general business.
As is evident from the fact that most mutual insurers have paid consistent premiums since the 1800s, through market crashes, world wars, and other financial crises, having your money put to work in a life insurance company is a safe strategy.
With indexed life policies, the cash value that is built up within the policy creates dividends for you by being invested in financial securities like derivatives and bonds.
While this could provide you with higher returns at times, it will have a higher correlation to the financial markets at large, and serve you less well as a hedge against market volatility in other parts of your investment portfolio.
An important consideration when buying a life insurance policy from a certain company is how financially stable that company is, to ensure that they will stay in business and safeguard your money indefinitely.
In general, mutual insurers tend to keep relatively larger financial reserves than their stock insurer counterparts.
One reason for this is that while the dividends paid by the mutual companies usually stays within the company by being accredited to the cash values of their policies, the dividends paid by the stock companies are paid to its shareholders, who might not reinvest them into the company.
In technical terms, this means that stock insurers in comparison to mutual insurers generally keep lower surpluses in relation to their total assets and liabilities.
As stock insurers valuation is driven by demand and supply in the financial markets, they generally offer more competitive current offerings than mutual life insurers.
It is however not uncommon for stock insurers to tweak different levers to make older policies less competitive, as a way of compensating for allowing newer policies to be more competitive.
With mutual companies, this is not general practice, and changes in payouts tend to affect old and new policies alike, which makes the financial performance of policies from mutual insurers more reliable over time.
Some of these differences can be understood from how people are hired at stock companies as opposed to how they are hired at mutual companies.
With mutual companies, all qualified policyholders are allowed to vote for the board of directors, which represents the policyholders interest in hiring, governing, and setting compensations for the executives.
With stock companies, on the other hand, the board of directors is voted in by the shareholders, who represent their interest in hiring, governing, and setting compensations for the executives.
In practice, this tends to result in much higher compensation for stock insurer executives than for mutual insurer executives, and more aggressive guidelines for managing the business.
Who Wins - Stock Insurers or Mutual Insurers?
No matter whether a life insurance company is a stock insurer or a mutual insurer, they tend to be very stable and profitable businesses on a whole.
Each of them does however have their own advantages and disadvantages, which we have learnt more about in this article.
For most people, permanent life insurance is bought to act as a safe haven asset, with low risk and predictable returns, that are not correlated to the broader financial markets.
For this purpose, mutual insurers generally work better, as their business model is more centered around stability and dependability.
Some people might however be prepared to take a bit more risk in permanent life insurance to higher potential returns or more coverage for a lower price.
For these people, stock insurers might be a better alternative, as their policies can generally be more competitive in exchange for an increased risk.
Blurring the Lines - Understanding (de)mutualization
For different reasons, sometimes stock insurers decide to become mutual insurers, which is called mutualization, or mutual insurers decide to become stock insurers, which is called demutualization.
In the cases where a mutual insurer transforms to a stock insurer, policyholders are generally granted shares in the company which starts being traded on public stock exchanges.
One example of this is when MetLife was demutualized in 2000. Even though the share price has gone up and down in pace with the broader economy, it has yielded a total return of about 450 % since then, which translates to an average yearly return of around 20 %.
While demutualization might be a good thing, it might for some policyholders mean that they are suddenly taking on more risk than they are comfortable with.
In these cases, an easy solution exists - to do a tax-free 1035 exchange, which you can learn more about in this article.
Life insurance companies can be either mutual companies or stock companies, which affects how they run their business, what products they offer, and what risk their clients can expect.
While there is no definitive answer to which form is the better one, we can generally say that mutual insurers are a better choice for people who are looking to minimize their risk, while stock insurers might be a better choice for people who are prepared to take on a bit more risk in reward for potentially higher returns or potentially lower costs of insurance.
Whether you are looking for a permanent life insurance policy from a stock insurer or a mutual insurer, White Swan’s digital marketplace and experienced professionals have got you covered.