Depending on the purpose and type of life insurance you purchase, the type of company from which you buy it can make a big impact. There are two types of life companies you can purchase from, stock companies and mutual companies. The difference in the two is the type of ownership in the company, and how they distribute profits.
A stock insurance company is held by stockholders, hence the name. In an effort to raise capital, the insurance company offered shares of the company on an exchange. When the company earns a profit at the end of the year, it is attributed to the stockholders benefit first, and may or may not benefit the policyholders of the company next.
Some of the great advantages of a stock insurance company are the ability to have offer stocks for the purpose of raising capital. This obviously allows the company to invest in itself and others in order to create value for its stockholders, and ultimately raise stock prices so the shareholders gain. The major disadvantage as a policyholder is the middle man, the stockholder. Because the stockholder gets its share first, policyholders get a much lessened, if any, of a share back to them. Also, the loyalty to a policyholder is second to the stockholders. A person who buys a stock this year could benefit quicker than someone who has had a policy with the company for an extended period.
A mutual insurance company is owned by the policyholders, and there are not stockholders. When the company earns a profit at the end of the year, distributions called dividends are attributed to the holdings of each policyholder. The dividend a company offers is a good, but not the only, measure of success for the mutual company, as it typically raises and lowers based on how profitable the company was, and expects to be in the near future.
The disadvantages to a mutual company are its barriers to create capital, as it is limited to what the company and its workforce can produce over time. Without the possibility to offer shares for immediate capital, long term planning is vital to a mutual company. Surplus of cash, even if operating cash, is seen as a good sign of both solvency and growth because of the ability for expansion. They can, however, demutualize if they see fit, and become a stock company down the road. The advantages lie in the possession of the policyholders because there is no middle man. Any profits which are distributed go directly to the policyholders since they are technically the owners in the company.
The type of institution in which you purchase your life insurance can have the greatest affect when considering permanent coverage. Because permanent life insurance is dependent on the policy’s ability to grow cash in the long run, mutual company’s dividend adds to the guaranteed cash growth, aiding in the performance and longevity of the policy.
Dividends, however, are not guaranteed.
They are variably dependent on the profitability of the company, although the volatility in change is relatively minimal.
In regards to term life insurance, the type of insurance company is much less noticed. Although the trend tends to lead term life insurance being more affordable from stock companies, it is not at all written in stone. Because mutual companies need to raise capital from its policyholders, a higher premium allows for more cash flow to the company. This, of course, is rebated in the form of a dividend. But if your policy is strictly for death benefit, there is little value in paying a higher premium.
It’s not uncommon to have more than one insurance company represented in a household. When working with an independent agent, they can offer you the best policy to suite your needs from many carriers. In certain situations, it may be best to have policies from multiple companies as you may require a competitively priced term policy from a stock company, yet a high performance permanent policy from a separate mutual insurance company, for example.
Always be sure to review the financials of the insurance company as well. Moody’s, Standard & Poor’s, A.M. Best, and Fitch all have different scales in which they rate companies, but they rate highly for solvency, long term projection, and effectiveness of each insurance company. The reason this is important is because the claims paying ability lies solely on the insurance company from where you purchased your policy.