What Is a Mutual Insurance Company?

Should I buy my life insurance policy from the mutual insurance company or in another way?

It’s one of many questions we all need to ask ourselves before purchasing the insurance coverage.

If you’re not sure what a mutual insurance company is or whether it should be your insurer, keep reading this article to find out!

What is a Mutual Life Insurance Company?

Insurance companies are either stock or mutual organizations, depending on their ownership structure.

The concept of mutual insurance first emerged in England in the 1600s. The Philadelphia Contributionship for the Insurance of Houses against Loss by Fire was the first successful mutual insurance company in the United States. It was started by Benjamin Franklin in 1752 and is still in use today.

Mutual insurance companies are established to meet the need for life insurance. Companies can offer different types of insurance coverage, including property and casualty, life, and health.

stock insurers

Image Source

Who Are the Owners of a Mutual Insurance Company?

A mutual company is a business that is owned by its policyholders, who are called “contractual creditors” and have the power to choose the board of directors. 

Mutual companies keep assets like insurance reserves, surplus, emergency funds, and dividends for the benefit and security of policyholders and their beneficiaries.

The management and the board of directors decide how much of the operating income is given as a dividend to policyholders each year. Even though it’s not always the case, some businesses have kept paying dividends every year, even when the economy was bad.

Whole Life Insurance Policy From A Mutual Insurer

Let’s see an example of a whole life insurance policy.

A whole life insurance policy is a kind of permanent life insurance, meaning it’ll provide insurance coverage for the entire life of the policyholder.

Besides that, the whole-life policy has a savings component in which your cash value accumulates.

With your whole life, you will have the same policy premiums for your entire life and the opportunity to grow cash value, borrow money against your policy, and have tax benefits. But there’s more!

If you buy your whole life insurance policy from a mutual company, you will get dividends. As we previously mentioned, the amount of money isn’t guaranteed. But if you purchase the policy from a reliable mutual insurer, it’s almost certain that you will earn dividends.

How to Choose the Mutual Insurance Company?

We’ve highlighted a few aspects of mutual insurance companies you have to check before signing a contract:

  • The life insurance company’s rating;
  • The life insurance company’s longevity;
  • History of dividend payments;
  • The loan arrangement;
  • The interest rate on loans;

There is no final answer to which insurance company you should choose because it depends on the state where you live, your needs, and your financial situation. But check out these things about mutual insurance companies and compare them to make sure you make the best choice.

Stock vs. Mutual Insurance Company

On the other hand, we have a stock insurance company. It is a company that is entirely owned by its shareholders.

The ownership of the stock company can be either privately held or publicly traded. The stock insurer is able to issue shares of stock to generate income.

Both mutual insurance companies and stock insurance companies provide insurance, but they have a completely different structure:

Company’s intention 

Stock insurance companies have a goal to maximize profits for shareholders, while mutual companies aim to cover the needs of their policyholders.

Company’s ownership

A mutual insurance company is owned by its policyholders, whereas a stock insurance company is owned by its shareholders. In stock insurance companies, policyholders don’t participate in the company’s management.

Distribution of earnings

Both mutual and stock insurers typically offer some sort of distribution, but they have slightly different organizational structures.

In mutual insurance companies, distributions can be reinvested back into the business or used to reimburse policyholders so they can lower their future rates. Distributions in a stock insurance company may be made to shareholders, applied to debt reduction, or put back into the stock company.

Investments

Because a stock insurance firm is constantly under pressure to increase earnings for shareholders, they frequently focus on short-term outcomes. As a result, stock insurers frequently invest in riskier, higher-yielding investments.

Mutual insurers, on the other hand, are more long-term focused, which typically prompts them to invest in more conservative assets.

Risk tolerance

Since mutual and stock companies have different investment approaches there is a difference in risk tolerance.

Stock companies have more options to generate earnings because they invest in riskier assets. However, the stock company depends on unpredictable investment results that are associated directly with the stock market which makes stock insurers less reliable.

In contrast, with mutual insurers, you have greater stability and zero risk. You know exactly now what will be in the future, how much money you’ll get through dividend payments and how much your accumulated cash value will be.

Should You Buy Your Life Policy from a Mutual Insurance Company?

The decision is yours. But if you ask us for our opinion, we always say YES.

Why?

Mutual companies are owned by policyholders, and their priority is to serve them. Mutual insurers don’t have a conflict between the short-term financial demands of investors and, on the other hand, the long-term interests of policyholders.

More importantly, with mutual insurers, you don’t have any risks. And when it comes to our money, we want to play it safe.

There is a common misrepresentation that investing must be risky. The truth is, it doesn’t.

And we have proof for that.