When selecting a life insurance policy, many people focus on evaluating costs and the availability of various riders, among other policy features. While these factors are well worth looking into, another important issue to consider is the type of insurance firm you are dealing with. Namely, is the firm a mutual life insurance company or a stock life insurance company?
Understanding the difference between these two forms of insurance company organization and how it impacts the policies they offer is crucial to making an educated purchase decision. While both types of insurers typically offer broadly similar life insurance policies and provisions, as we shall see, the ownership structure of mutual life insurance companies puts these insurers in a position to take a different approach to managing their businesses and offering policy features than that taken by stock life insurers.
The “BEST” Life Insurance Company
It is important to mention at the outset that we at I&E do not believe there is one best life insurance company or policy. The right company for you will depend in large part on your specific needs, goals and objectives.
In addition, even if the best company for you is a mutual company, you still have to consider if the company practices direct vs non-direct recognition, if they are participating whole life insurance and if they allow the policy to be maximized for cash value growth or death benefit.
Defining Mutual and Stock Life Insurance Companies
Mutual life insurance companies, also known as “Mutuals”, have no shareholders. The policy owners are members of the corporation controlling the insurer and this grants them membership rights.
The rights of a mutual company policyholder include:
- Contractual benefits, such as dividends declared by the board of directors
- Participation in corporate governance, typically by voting for the company’s directors
- Receipt of any outstanding value in case of liquidation or demutualization of the corporation
- Expectation that the corporation’s main objective will be to operate in the best interests of the policyholders
- Ability to launch legal action against the company’s directors and officers if they violate their fiduciary duties
Profits earned by a mutual insurance company must be either kept within the company or distributed to policyholders as dividend distributions or reductions to future premiums.
Stock life insurance companies, on the other hand, are owned by their stockholders, who vote for the officers of the company, rather than by their policyholders. The profits earned by a stock life insurer are either distributed to the company’s stockholders or invested back in the business. There is no requirement that they be shared with policy owners. These companies are managed for the benefit of their shareholders, although to stay competitive they must offer policies that are attractive to consumers.
Mutual Company vs Stock Company: Differences in Operating Approaches
Historically, mutual life insurance companies have a record of being more apt to consider the long-term health of the business when it comes to making strategic decisions than stock life insurance companies.
This tendency likely stems from the difference in focus between the two types of insurers: mutual life insurers are managed solely for the benefit of their policyholders while stock insurers must consider the desires of their shareholders to make a profit along with the need to provide life insurance policies that attract interest from potential applicants. Because of this, mutual insurers typically can set lower profit goals than stock insurers, given that they aren’t subject to pressure from outside investors to deliver high returns.
This long-term focus means mutual life insurance companies usually take a more conservative approach to investing their funds. These firms differ from stock companies in that they don’t have the ability to raise funds by issuing stock in times of crisis. Thus, their investments need to be able to withstand market booms and busts, which requires a more slow and steady approach.
Stock insurance firms must report on their performance every quarter to their investors, which means their management needs to focus on shorter term performance to a greater degree than mutual life insurers.
Additionally, unlike the management of mutual life insurers, the management of stock life companies often receives a portion of their compensation in the form of stock options linked to the company’s stock price. This can cause them to take on more investment risk as a means of boosting the company’s stock price to enhance their compensation.
As stock life insurance companies management’s stock options typically vest, or come due, at different time periods, they are incentivized to maximize the company’s performance on what is often a shorter time horizon than that of policyholders, presenting a potential conflict of interest not found with mutual life insurance providers.
Given the difference in ownership structure between mutual vs stock companies, it should come as no surprise that studies have found that mutual life insurers typically are more frugal than stock life insurers at running their businesses. This extends to the issue of management compensation, which is usually higher for stock insurance company executives than for their opposite numbers at mutual life firms.
One factor driving this may be that qualifying policyholders at mutual companies get to vote for the corporation’s directors, while this is not the case at stock companies.
Fraternal Life Insurance Companies
There are a select few fraternal life insurance companies as well. Fraternal companies typically focus on providing financial products to its members and member families, like group life insurance. Members of Fraternal life insurance companies usually feel a greater connection to the community, then with stock or mutual companies.
The Top Mutual, Stock and Fraternal Companies
We ranked the following top 10 mutual, stock and fraternal life insurance companies by assets as of April 2018. So, the following top 10 lists are simply a measure of the companies with the most assets and not a recommendation as to which company is actually the right one for you. For a specific recommendation, please give us a call for a free strategy session.
Top 10 Mutual Life Insurance Companies
- Northwestern Mutual
- Massachusetts Mutual
- New York Life
- Guardian Life
- Minnesota Life
- Ohio National
- American United Life
- Penn Mutual
- Mutual of Omaha
- Lafayette Life
Top 10 Stock Life Insurance Companies
- Met Life
- John Hancock
- Lincoln National
- Jackson National
- AXA Equitable
- Principal Life
- Brighthouse Financial
- American General
Top 10 Fraternal Life Insurance Companies
- Thrivent Financial
- Knights of Columbus
- Modern Woodman of America
- Woodmen of the World
- GBU Financial Life
- Greek Catholic Union of USA
- Catholic Financial Life
- Gleaner Life Insurance Society
- Catholic Life Insurance
- Catholic Order of Foresters
Mutual Life Insurance Policies Compared to Stock Life Insurance Policies
One advantage of purchasing a life insurance policy from a mutual life company is the strong history of dividend payments paid to policyholders by many of these companies. As dividends are treated as a return of premium by the IRS, they are not taxable to the policyholders who receive them.
Without the need to also return profits in the form of dividends to shareholders as well, mutual life insurers are typically able to build up larger surpluses considered in relation to total assets than stock insurers, helping support consistent dividend payments.
This strategy reflects the generational approach of mutual life insurers, who focus on managing their companies to enable them to provide coverage for multiple generations of policyholders.
While life insurance dividend payments are not guaranteed, the most prominent U.S. mutual insurance companies have racked up admirable records of paying dividends year in and year out, with some of them having done so for more than 100 years without missing a single year of dividend payouts.
While participating stock insurance companies may pay dividends, they may also do so to their shareholders. These companies pay dividends out of their profits quarterly, which acts to reduce their average surpluses as a percentage of their total assets and liabilities.
Another advantage associated with life insurance policies sold by mutual insurers is that these firms are known for delivering similar treatment to their complete book of business, meaning that when payout rates are lowered due to falling interest rates these companies typically lower them for older policies as well as for newer policies. Stock insurers are not always known for being as equitable in their treatment of older life insurance products in similar situations.
Over time, the focus of mutual life companies on providing policyholders with equitable treatment has enabled them to offer cash value life insurance policies that, according to some experts, have provided more value for the dollar than the average policy issued by stock life insurance companies.
However, operating as a mutual life insurer has some disadvantages, including:
- Less flexibility in raising capital or merging with or acquiring other companies due to an inability to issue stock
- Less flexibility in financial reporting due to the need to record all transactions on the books of the parent company
- Less scrutiny of management performance due to the lack of outside investors in the corporation.
While these disadvantages may not be relevant to a policyholder, they can lead to a mutual life’s management deciding to reorganize the company to overcome some of these issues.
Reorganizations of Mutual Life Insurance Companies
How significant the disadvantages cited above truly are can be a matter of perception. In addition to addressing the issues mentioned above, another reason cited as motivating such conversions is the potential for the company’s management to reap the greater financial rewards typically paid out to stock life insurance company leadership. Depending on the type of conversion, reorganization can offer a potential financial benefit to policyholders, who gain shares in the insurer upon conversion to a stock format.
Reorganizations come in two types:
Full demutualization: A mutual life insurer converts to a stock insurance company. The net worth of the mutual company, also known as its surplus, is typically distributed to its policyholders in the form of stock, cash, and policy enhancements. The policyholders no longer have membership rights, but their insurance policy contractual rights remain in effect. The company will often issue stock at the same time to raise capital to pay for the conversion and to provide it with working capital.
Mutual holding company (MHC) conversion: Also known as a mutual insurance holding company (MIHC) conversion. In this type of conversion, the mutual insurance company is converted to a stock insurance company that is fully owned by a mutual holding company. Often a stock holding company will be placed between the mutual holding company and the insurance entity to offer the company greater flexibility. Subsidiaries can be owned by the mutual holding company or the stock holding company, depending on their purpose.
Full demutualization is typically considered to be a better alternative for policyholders. They generally end up with stock in the insurer, or cash or policy enhancements of comparable value, in return for giving up their membership rights due to the conversion.
In a mutual holding company conversion, policy owners are typically granted subscription rights in the stock company subsidiary rather than outright shares. Thus, unless they pony up to invest in the newly created stock mutual holding company, they don’t benefit from the conversion to the same degree as they would in a full demutualization.
The occurrence of a reorganization is highly unpredictable, as a result the potential for demutualization of some sort should generally not be a primary factor in determining what type of life insurance policy to buy. However, they do happen from time to time, so it is important to be aware of the possibility if you are purchasing a life insurance policy sold by a mutual life insurance company.
Choosing a life insurance policy can be complicated, given the many considerations involved. While policies sold by mutual life insurers are similar in many ways to those sold by stock life insurance companies, as we have seen, there are certain benefits to buying policies from mutual insurers.
These benefits include the generally more conservative management and investing approach of such companies along with their ability to maximize policyholder’s dividends from the profits they earn.
Additionally, mutual life insurers may be thought to be more likely to equitably treat all policyholders, such as in cases where falling interest rates result in reduced payout rates on the company’s entire policyholder roster.