What is a Mutual Life Insurance Company?
A mutual life insurance company is a company that’s owned by its policyholders. In other words, when you buy life insurance from a mutual company, you get an ownership stake in that company — and may see profits from it.
How mutual life insurance companies work
A mutual life insurance company seeks to serve the people it insures, not just because they’re paying customers, but also because they’re owners. This differentiates mutual companies from privately owned ones or stock insurance companies, which focus on serving their shareholders.
Policy owners at a mutual life insurance company get two specific things from their ownership stake:
Some management control. They may get a say in who sits on the board of directors, for example.
Return of profits. When the mutual life insurance company performs well, policy owners see a share of the profits returned to them. Those might come in the form of dividends or premium reductions.
Just like stock insurance companies, mutual insurance companies maintain a portfolio of investments. But because mutual life insurance companies aren’t publicly traded, they’re generally more conservative in their investment approach. Without the need to post quarterly reports, they don’t have the same pressure to see short-term gains as a stock company. In general, they’re more likely to look for slow-and-steady growth.
Another difference between stock companies and mutual companies comes in the form of financial transparency. Stock companies are required to share quite a bit of financial detail with their shareholders. Mutual companies, on the other hand, aren’t subject to stock market regulation and may consequently keep more of their inner workings internal. They may not publicize how they calculate dividends, for example.
That doesn’t mean policy owners at a mutual company are underserved, though. Policy owners at a stock insurance company get no say in how the company is run, nor do they get any profit-sharing arrangement. Those benefits go to the company’s shareholders. Comparatively, the mutual insurance company’s top priority is its policy owners because they’re also the company owners.
Mutual insurance companies becoming stock insurance companies
There may come a time when a mutual life insurance company decides to convert to a stock insurance company, a process called demutualization. The main draw here is that demutualization gives the company a way to raise money by issuing shares. As a mutual company, the only way to raise capital is to increase rates, borrow money, or hope investments outperform expectations.
If you have a life insurance policy through a mutual company that demutualizes, you may get shares in the company as it becomes publicly traded.