Wednesday, February 28, 2018

My Choice Between a Stock vs Mutual Insurance Company

There are two type of insurance companies you can choose from when you buy insurance. One is called a stock insurance company and the other is called a mutual insurance company. In this article, I'm going to break down what each type of company is. I'll also talk about which type of company I like best.

What is a Stock Insurance Company?

A stock insurance company is owned by shareholders. Any profits or losses are shared with the shareholders. Stock of the insurance company is publicly traded on the stock exchange.

A stock company puts the focus on providing a good return for their stockholders.

What is a Mutual Insurance Company?

A mutual insurance company is owned by it's policyholders. All profits and losses are shared with the policyholders.

When mutual companies share profits with their policyholders, it's in the form of dividends. Dividends represent a return of premium to the policyholder. And while dividends are not guaranteed, this structure puts the focus on the value to the policyholders.


One concern if you choose a mutual company over a stock company is that a mutual company can demutualize. Demutualization is when a mutual company converts to a stock company. This could happen if a mutual company decides it needs to raise capital.

A good example of demutualization was when Prudential converted from a mutual company to a stock company in 2001. Prior to demutualization, Prudential had struggled with some large claims from hurricanes and a legal settlement and they needed capital. As a result, Prudential is a much different company than they were before they converted.

Before that, if you'd asked me if Prudential would ever convert to a stock company, I would have thought you were crazy. The moral of the story is that there is no guarantee a mutual company will always stay that way.

Stock vs Mutual - My Choice

For most insurance, I don't really have a preference between a stock company and a mutual company. However, when it comes to permanent life insurance, I would definitely choose a mutual company for a couple of reasons.

The first reason is because I'm fan of guarantees. Whole life insurance from a mutual company provides more guarantees than the universal life products that stock companies offer.

And because of the guarantees in their whole life policies, mutual companies get the edge from me for that particular product.

The second reason I'm not a fan of stock companies is because they are publicly traded. A publicly traded company has a lot of pressure to increase it's stock price. If the financials of the company go south, their going to try and find that money somewhere. There's a good chance it could come from the expenses hidden in their universal life contracts.

In fact, the New York Times reported a lawsuit accusing Transamerica of doing exactly that.

Market pressures can not only lead to bad management decisions, there's also the chance the company a target for a takeover.

This could lead to the same problems.

While bad management can happen in either a stock or mutual company, I'd still opt for a mutual company because I believe a stock company is more vulnerable to problems than a mutual one.

That's not to say a mutual company can't experience problems so you still have to be careful which mutual company you choose.


While most people probably couldn't tell you whether they have insurance at a stock company or a mutual company, it's good to know the type of company you are buying from.

And when it comes to permanent life insurance, my preference is for a mutual company over a stock company.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.