Mutual Insurance Companies: The Tortoise vs. the Hare

“Slow and steady wins the race.”
Aesop, The Hare and the Tortoise

We suggested in our last post that investors might benefit from boycotting Wall Street, as there seems little to protect consumers from risky schemes when even the rating agencies dish out credit ratings with no accountability.

But if stocks are risky, the price of gold difficult to predict, and with banks representing dismal returns at best and instability at worst, then where, pray tell, can money be saved or invested?

Maybe Our Parents Did Know Best

In a Forbes.com article, “A Financial Bunker for Scary Times,” John Girouard, columnist and founder of The Institute for Financial Independence asks,

“Suppose there was a financial instrument… so solid it could survive the Great Depression intact; that earned untaxed interest at a competitive rate; that could be borrowed against at will regardless of credit conditions; and that could be used by individuals as well as major corporations and banks as a safe harbor during economic turmoil?”

The financial instrument Girouard is speaking of is dividend paying Whole Life Insurance, which is re-gaining favor amongst investors tired of roller coaster returns. And for anyone intent on insulating themselves against Wall Street excesses, the providers of choice of whole life are mutual insurance companies.

Mutual insurance companies stand in contrast to stock insurance companies, which have shareholders and quarterly reports to worry about. The modern equivalent of certain European trade guilds of the 1600s, whose members pooled money to help each other’s families in times of sickness or death, mutual companies operate for the benefit of their members, or policyholders.

Mutual insurance companies are mutually owned by policyholders, and the companies are legally bound to return all profits to policy owners in the form of dividends.

The flagship product of mutual insurance companies has long been permanent or whole life insurance with a cash value component. Many of us have parents and grandparents that relied on this type of policy for large and small emergencies, but times do change. Written off by younger investors seduced by the stock market adrenaline rush in the 80’s and 90’s, whole life insurance came to be viewed as an antiquated financial instrument of a previous generation – or worse – what uninformed investors bought before guru’s like Suze Orman and Dave Ramsey convinced them to “buy term and invest the difference.”

With the stock market’s wake-up call of 2008, some investors abandoned typical financial “plans” relying on stock market returns and headed for safer hills. By the end of 2008, two of the larger mutual insurance companies, Guardian Life and New York Life, were experiencing double-digit growth in sales of individual life policies.

Mutual Insurance vs. Stock Insurance Companies

While mutual companies were booming, publicly traded insurance companies were melting down with the rest of the economy, As Forbes magazine reported in “Mutual Respect”:

“With their survival on the line, publicly traded insurers are scrambling for cash by cutting dividends and issuing new shares (diluting existing investors), begging regulators for a relaxation of capital requirements and lobbying Washington for a cut of the $700 billion Wall Street bailout.”

Some stock insurance companies lost half or more of their value, meanwhile, mutually owned insurers didn’t ask for a dime. Their values held, or even improved. Some even announced near-record dividends to policyholders, such as Guardian Life, who paid its policyholders a healthy 7.3% dividend in 2009. By 2011, Guardian’s dividends paid to policyholders had grown to $795 million – an amount greater than the entire TARP bailout.

Update: Chart below shows Guardian’s dividend payouts to policyholders rose again in 2012:


Perhaps one lesson to be learned is this: The more an insurance company looks and acts like a stock, the less it can be expected to provide the benefits of solvency, stability, and consistent returns traditionally provided by insurance companies. As one mutual bank says in it’s ads, “We’re Main Street. Not Wall Street.”

However, buyers must ask some questions (or read some websites) to determine what companies are Main Street and which are Wall Street. The “mutual” moniker is no guarantee of a mutual company, nor has it ever been used only for mutual companies.

Similarly, just because a company has partially demutualized doesn’t mean that it is unstable. Still, how a company is structured and where its loyalties lie is something to consider when choosing a company. In a diatribe against demutualization Rich Franzen points out the conflicts of interest experienced by stock insurance companies:

“When a mutuality writes a permanent insurance policy, it is not simply a legal contract. It is also a solemn commitment to be there 50 years from now. Corporations do not think in terms of 50 years. Or 5 years. They think in terms of 3 months — this quarter. How did we do this quarter? “OMG, we need to lay some people off to make the quarterly report look less bad!” This is no way to run a life insurance company….”

The Long Term View

As John Schlifske, Chairman and Chief Executive Officer of Northwestern Mutual explains, “Think of the fable of the tortoise and the hare. We want to be the tortoise, grinding it out year after year, doing things we know are sustainable.”

More than just talk, companies such as Northwestern Mutual and Guardian Life have survived and thrived through the Civil War, the Great Depression, and the World Wars, paying dividends to policy owners for more than 140 consecutive years. When the stock market, investment banks, even Fanny and Freddie were reeling, most mutual insurance companies didn’t even flinch.

Northwestern Mutual’s dividends paid to policy owners before, during, and after the sub-prime crisis were as follows:

(Source: www.NorthwesternMutual.com)

Mutual insurance companies may never boast double digit returns or garner the media attention lavished on high tech IPO’s, but these are exactly the kinds of Tortoises you want to be riding when the stock market rabbits are running in the wrong direction.

How can a mutual whole life policy help you build sustainable wealth, reduce taxes, and have more financial options? We thought you’d never ask! Partner for Prosperity’s own Kim D. H. Butler has written a powerful little book that will let you in on how the wealthy utilize whole life insurance throughout their entire life. It’s called Live Your Life Insurance, and it’s available on Amazon as a paperback or Kindle eBook.

Share this post

Share on facebook
Share on twitter
Share on linkedin

Begin your journey with the Prosperity Action Pack

Get immediate access to our short ebook Your Guide to Activating Prosperity, audio recording, our summary sheet about the 7 Principles of Prosperity™, and our subscriber-only Prosperity on Purpose Round-Up. 

Just fill out this form and get access now!