When you’re in the market for life insurance, one of the first steps is to know the product you want. Whole life insurance is good permanent, guaranteed insurance, and term insurance is temporary insurance that’s great for filling insurance gaps. Yet once you know the product, it’s just as important to determine what company you buy your insurance from. While you may want to dive deeply into the topic of choosing the best life insurance company, there’s really one thing that’s most important… whether you choose a mutual company vs. stock company. 

If you want to purchase whole life insurance that pays interest and dividends and is a certain place to save, it’s critical that you choose a mutual company. Mutual companies have longevity and a duty to their policyholders—let’s explore why. 

What is a Mutual Insurance Company?

A mutual company is a life insurance company owned primarily by the policyholders. This means that when you buy a policy, you become a partial owner. As such, you get the opportunity to partake in all profits through dividends.

While dividends are not guaranteed each year, you are guaranteed to participate in any profits the company makes. And generally, mutual companies are profitable and have been for a long time. One major reason mutual companies are profitable is that mutual companies invest much more conservatively in order to maintain good financial standing and develop some longevity. 

Stock companies are—you guessed it—owned by stockholders. And stock companies tend to make riskier decisions with investments because of this. They have no obligation to the policyholders to do anything other than provide insurance. 

What Are the Rights of Mutual Company Policyholders?

Policyholders within mutual companies have all membership rights as other members of the corporation. Who participates in profits? Policyholders. Who elects the governing body of a mutual insurance company? Policyholders do. 

Policyholders even have rights if the company was to suddenly demutualize. While this is certainly rare, it has happened in recent years. When this happens, policyholders receive any outstanding value in the liquidation process. 

Being a member of a mutual company also means that the boar should be acting in your best interest. While this can translate to making profits so that you receive dividends, they also have a duty to make money responsibly. After all, they have to be able to handle all financial obligations, including paying death claims. You can be certain that mutual insurance companies are taking it all into consideration. 

Pros and Cons of a Mutual Insurance Company

So what makes a mutual company tick? Let’s explore the pros and cons of mutual companies. 

Long-term Thinking

One of the major pros of a mutual company is that they are not beholden to outside forces. This means they don’t necessarily have outside pressure to invest in ways that may invite more risk. Mutual companies have to think more about the long-term health of the company. We love long-term thinking, because it’s crucial to make good decisions for your future self, so we appreciate companies who value this principle. 

Accountability to Policyholders

We also think it’s a pro that mutual companies tend to be more frugal and invest conservatively. Since members of mutual companies can vote on the company’s leadership, that leadership remains accountable for their choices. Leadership isn’t compensated based on their investments, so they’re not motivated to take unnecessary risks in the hope of a payout. 

Strong History of Dividends

Depending on how you’ve been conditioned to think about money, you might not consider conservative investments to be a pro. Many people believe that “more risk equals more reward.” And yet risk is really the likelihood of loss. Mutual companies understand this, and so they avoid exposing their capital to unnecessary risk by investing more heavily in bonds and real estate that have some certainty. 

If you think conservative investments are a con, consider this: the major mutual companies have decades-long track records of paying dividends. In other words, through conservative investments, mutual companies have turned a profit during wars, recessions, and varying political climates. We’ll take slow and steady growth over the volatility of the stock market any time. 

Large Surpluses

Since mutual companies are thinking about the long-term health of the company, they tend to have large surpluses. This ensures that the company can weather a rough economy and still pay all death claims, dividends, and other obligations. 

Less Flexibility for Management

While this may not affect policyholders directly, a disadvantage for mutual companies is that there is less flexibility in how they can raise capital because they cannot issue stock. This is one reason mutual companies have to think long-term: because they have to be able to ride out a tough economy. 

A lack of outside investors may also mean that there’s less scrutiny on management and how they are performing. 

What is a Stock Insurance Company?

A stock insurance company is a company that issues stocks to shareholders. Rather than being run by policyholders, a stock company is beholden to the shareholders. They are able to vote for the company officers and are often able to monitor management more closely. 

Since stock insurance companies are owned by shareholders, stock companies have an obligation to invest in the interest of their shareholders. While this means stock companies may make riskier investments, they are also obligated to offer attractive insurance products. And because insurance is a contract, they must also be able to meet their insurance obligations to customers. However, they aren’t necessarily thinking long-term.

Pros and Cons of a Stock Insurance Company

As an insurance company, stock companies are still required to provide a legitimate insurance product. So even if you chose to buy a whole life insurance policy from a stock company, you would still have the guarantees that come with a whole life insurance policy. However, stock companies are not obligated to share profits with policyholders, which means you cannot expect them. 

Stock companies are also run and managed by executives that shareholders vote on. This means that shareholders call the shots and can make changes to management based on whether it’s profitable for them. This may or may not be in your best interest as the policyholder. Additionally, managers of a stock insurance company may also receive compensation in the form of stocks, encouraging them to seek greater short-term performance. 

The Difference Between Mutual and Stock Insurance Companies

Ultimately, the main difference between mutual and stock insurance companies comes down to who is in “control.” And with mutual companies, YOU have the most control as the policyholder. It’s a bonus that you also get to benefit from dividends. If you’re choosing to buy whole life insurance to have greater control over your financial destiny, then the benefits of a mutual insurance company should be evident. 

If you’re ready to get started with a whole life insurance policy, we can help you work with a mutual company that has your best interests at heart. Let’s connect and see what opportunities await you. If you have questions, please send them to welcome@prosperitythinkers. We’re happy to help!