Mutual Insurance Companies: The Tortoise vs. the Hare

Like the tortoise and the hare, slow and steady wins the race. The same is true of your finances, and the place where you choose to warehouse your wealth. While many people want to skyrocket to success, that method of growth is often up to chance. It’s not systematized, nor guaranteed, and certainly doesn’t have the best track record. If you want certainty—a safe and predictable way to grow your wealth over time—mutual insurance companies are for you.

In a Forbes 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. Since 2008, whole life insurance has been regaining favor with investors tired of the roller coaster. For anyone intent on insulating themselves against Wall Street, the ideal providers are mutual insurance companies.

What is a Mutual Insurance Company?

Mutual insurance companies stand in contrast to stock insurance companies, which have shareholders and quarterly reports to worry about. They’re the modern equivalent of certain European trade guilds of the 1600s, whose members pooled money to help each other in times of sickness or death. Mutual companies operate for the benefit of members, not outside stockholders.

Mutual insurance companies are mutually owned by policyholders, and the companies are legally bound to return all profits to policy owners as 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. Of course, times change. Written off by younger investors seduced by the stock market adrenaline rush in the 80s and 90s, whole life insurance became known as an antiquated financial instrument of a previous generation. Worse still, some viewed it as a product that uninformed investors bought before “gurus” like Suze Orman and Dave Ramsey convinced them to “buy term and invest the difference.”

However, a recent annual report shows just how reliable mutual companies are…no matter the economy. One company shared, “Declaring a dividend for the 168th consecutive year underscores [our] commitment to financial strength, mutuality, and delivering ongoing value to policy owners.”

Mutual Insurance Companies vs. Stock Insurance Companies

In the economic uncertainty of 2008, many investors ditched the stock market and headed for safer hills. This resulted in major growth for many major 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, which 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:

In a 2020 report, Guardian announced a $1.05 billion dividend payment to policyholders and a 5.65% dividend rate for 2021. Guardian and other mutual life insurance companies have an incredible track record of creating certainty for customers.

The more an insurance company looks and acts like a stock, the less we can expect it to provide the benefits of solvency, stability, and consistent returns traditionally provided by insurance companies. As one mutual bank says in its ads, “We’re Main Street. Not Wall Street.”

A Word of Caution

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 the company’s structure and where its loyalties lie are 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 of Mutual Insurance Companies

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 160 consecutive years. When the stock market, investment banks, and 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 IPOs, yet these are exactly the kinds of Tortoises you want to be riding when the stock market Hares are running in the wrong direction.

In the most recent annual report on mutual companies, one shared this sentiment, which gets to the heart of why mutual insurance companies are critical. “Our founders knew that creating shared value is a journey that requires discipline, commitment, and a sense of purpose. After nearly 170 years, despite changing economic conditions, we remain guided by our purpose.”

Looking to Build Sustainable Wealth?

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! Prosperity Thinkers’ own Kim D. H. Butler has written a powerful little book that will let you in on how the wealthy use 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.

If you’d like to cut to the chase and get started, we’d love to help YOU live your life insurance. You can connect with us here, or email us with your questions at welcome@prosperitythinkers.com.