Stock or Mutual? That is the Question – Episode 208

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have my co-host and best-selling financial author, Kim Butler. And by best-selling financial author, I mean she has several books out there on Amazon if you want to check those out. Also, we have a free book that we will be mentioning that is only available for free to our podcast listeners before we’re done today. So we’re going to today start in talking about life insurance.

[00:54] And when most people think about life insurance, they think of term insurance or they think of whole life insurance and we’ve spent a lot of time defining those. But now once we look into the whole life arena, which there’s a purpose for term insurance and you’re welcome to listen to some of our podcasts on there, but we’re basically saying if you’re going to get a whole life policy, should you go with a stock company or could you go with a mutual company? And Kim, maybe you could start us off by just telling us what those terms mean. Absolutely. I’m delighted to be able to have this conversation because it is definitely not in the mainstream press very much. And a lot of people, of course, don’t know the difference.

[01:43] And I was just at an event earlier where somebody that loves life insurance was joking about losers in the life insurance arena. Frankly, the only people that are losing in the life insurance arena are doing so because they are having products that don’t have guarantees attached to them. So a whole life, as we know, is most often from a mutual company. And a mutual company provides that policy with a guaranteed death benefit, a guaranteed premium, and a guaranteed cash value. And then it also, so this again is a mutual company, it also has historically paid dividends on top of all those guarantees. Now, dividends are not guaranteed. Dividends are from the insurance company to the policy holders.

[02:47] And a mutual company only has policy holders. There are no stockholders in a mutual company. The actual owners of a mutual company are the policy holders. And so these dividends are paid based on the profitability of that mutual life insurance company. Now, part of the reason that this is just not very well known is that according to some statistics that I read recently, only 19% of the life insurance companies are mutual companies. And there is another subcategory called a mutual holding company that would also qualify, only 19% of them. Whereas 75% of all the life insurance companies are stock companies, meaning that they have stockholders that they have to pay, just like any company does,

[03:52] first. And then they get to do whatever else they’re going to do. Now, for those of you that are realizing I’m not at 100% yet, there is another type, and that’s called a fraternal organization. And 6% of the life insurers are fraternal. So Todd, actually, I think you have some experience with a fraternal organization, yeah? Just that’s one of the first ways I learned about life insurance is the church that I belong to is a Catholic church. And the Knights of Columbus was formed as I believe it is the first life insurance company ever formed. And it’s been a fraternal company ever since it was originated. So fraternals, to my knowledge, and I’ll admit I’m not an expert on them at all. I have lots of expertise around the mutual insurance companies, but I believe

[04:47] that fraternals operate very similarly. They have a fairly select clientele, although I think that’s broadened a little bit as time has marched on. And they operate like a mutual company does, i.e. where the dividends are shared with the policyholders who are the owners of the company. Exactly. So I want to elaborate on this dividend payment, because most people grow up and they learn about dividends from a company like Coca-Cola as an example. And so there’s a very important distinction to make between dividends from a public stock company, whether we’re talking life insurance or not, versus dividends from a private mutual company that sells whole life insurance. So I’m just going to play a little story out here that hopefully will be

[05:42] helpful to people. The typical person that receives a dividend from a company like Coca-Cola is going to reinvest that dividend in Coca-Cola stock. And when that happens, of course, the value of the Coca-Cola stock is then subject to the fluctuations of the stock market. And it can go up, in which case you could say the reinvestment of that dividend was a positive event. Or it could go down, in which case you could say the reinvestment of that dividend was a negative event. And as we know, it could continue to go up and down and up and down and up and down. And you literally could, if you sold after it went down, you would lose that dividend. So that’s what happens when somebody gets a dividend from a stock company.

[06:29] Again, whether it’s stock life insurance company or just a regular stock public company is irrelevant. Alternatively, if you get a dividend from a mutual life insurance company, that dividend you also have choices with just like you have choices with your Coca-Cola dividend. And while most people reinvest their Coca-Cola dividend versus, for taking it in cash, most people also reinvest their mutual life insurance company dividend versus taking it in cash. And yes, by the way, you can take it in cash. But most people reinvest. Well, the way that a dividend is reinvested inside a life insurance policy, a mutual oriented whole life insurance policy, is to purchase what’s called paid up additions.

[07:25] And what that means is that once that dividend gets paid into the paid up additions rider, it becomes a part of cash value. And cash value can never go down. That’s a very important distinction from a whole life insurance policy compared to a whole life insurance policy at a mutual company compared to, for example, a universal life at a stock company. There is the important additional aspect of the guaranteed cash value that rises. So again, on a whole life from a mutual company, cash value has a guaranteed component and a guaranteed rise every single year. It sets a new floor and it can never go down. You know, it’s interesting. I was just on Josh Gelinski’s radio show the other day and somebody

[08:32] called in and said, I have this policy that I’ve been paying into for a long, long time and the death benefit is starting to shrink. Well, that policy is universal life. It is not whole life because if somebody continues to pay into whole life, the death benefit is going to rise. And that rise is coming from those dividends from the mutual company being reinvested. Is all that making sense so far? I just want to clarify just a couple of points. So number one, the dividends that are paid to me annually, once they’re in my account are mine to keep forever. They can’t be taken back even if the company loses money the next year. My account balance stays the same. And two, any increases in death benefit also are locked in so that

[09:28] my death benefit can’t go down. That’s correct. And those dividends are often known as a participating way of including yourself in the mutual company’s profits. So they’re called participating policies. And sometimes it’s even shortened to the word PAR. A participating policy includes you as the policy holder in the profits of the company. And then, of course, there are, from the stock companies, non-PAR or non-participating policies where you don’t get included. But if you’re talking whole life from a mutual company, those are typically participating policies where that dividend and that increase in death benefit, as you’ve stated, are yours and yours to keep. Super. I know one of the biggest arguments that I ever lost in my life

[10:24] was my attraction to index life insurance. It is so sexy and pretty. And the margins in the stock market for the last 35 years, if you pick the right years and average them together and all of this kind of stuff. And I loved every minute of it until, actually, it was your husband, happened to show me that a good old fashioned whole life insurance policy is going to plot along and win at the end every time. Yes. And plot along is a great word for it. You know, I’ll tell clients on the phone, it’s boring, but it’s very effective. And as a general rule, we want to compare whole life insurance from a mutual company to a cash account or a savings account. It’s really a liquidity-oriented product.

[11:21] And yet, you’re right. When you actually add up all the expenses that reduce the gain on all the other types of products, could be 401Ks, mutual funds, index universe life, et cetera, et cetera, the plotting along slow and steady increases of a whole life can come very close to equalling, if not potentially even being better than all of those other products. And it’s why a lot of people out there do talk about whole life insurance being an investment. I understand that statement, even though I don’t think it’s correct. Whole life is a place to store cash. But I remember in 2009 and 2010, people looking at their entire portfolio and saying, my whole life insurance policy is the only thing that grew and didn’t shrink.

[12:15] And then the next year, we’d meet and they’d say it again. My whole life insurance policy is the only thing this last year that grew and didn’t shrink. And that is the nature of a whole life product, again, from a mutual company. So as you’re doing your research out there, please make sure that you’re clear on the difference between whole life and universal life. And Todd, as you mentioned, we have a lot of podcasts on that subject. But also be seeking the mutual company environment. And we’ll be writing a blog post on this in the future so that you can continue to read and learn and listen about the amazing ability of a mutual company to survive. Because its business model is to collect premiums

[13:06] and pay claims. Most of the life insurance companies that are mutual, that is their primary business. They’re not doing car and home insurance. They’re not doing a whole bunch of other ancillary things. They’re in business to receive that premium stream. And it is from that business model that they pay their dividends. Yes, of course, they do investments, too. But a lot of people think all their dividend paying ability is from their investments. And that’s not really accurate. It’s from their business model that it pays. And most mutual companies are at least 100, 150, some of them close to 200 years old, having survived every financial malady that we have had in the last 150 some years. So it’s definitely a place to check out

[13:56] in terms of the commitments that they make and keep and the confidence that we can have that our dollars are going to be there and the fact that those dollars are legally reserved dollar for dollar, not like the banks that are only reserved maybe 7 to $0.10 on the dollar. But the mutual companies, the whole life insurance product companies have their reserves as dollar for dollar environment. And that’s what it allows them to be so stable. Now, Kim, when I started this, I made a promise that we were going to give the folks something for listening today. So don’t make me a liar. Oh, yes, yes. We have a book called Financial Planning Has Failed. It covers this life insurance area a bit. And there’s a couple other treats included as well.

[14:53] It is available only at partners number four prosperity.com slash ebook. There is an audio version and there’s also a PDF. And again, that’s Financial Planning Has Failed and it’s partners number four prosperity.com slash ebook. Thanks so much, Kim. I know I learned a lot talking to you today and thanks again to all of our listeners. We’ll be talking to you again real soon. 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. I founded Ornote in 2013. We made clothes for cyclists. For me, the best part of Shopify is the possibility

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