Stock versus a Mutual Company
Knowing differences about a company you are choosing to do business with can be absolutely critical to the outcome you are looking to achieve. Most of us have taken a business class or two, or have come across the explanations of different types of business entities somewhere in life. Some of us know the benefits and tax advantages of the different entities. But I have found that few of us understand the impact the entities can have on our choice to purchase insurance from that company. In every life and long term care consultation I do, I always ask, “Do you know the difference between a stock company and a mutual company?” Once in a while I get a ‘yes, a stock company has stocks and a mutual company doesn’t’. Yes, but that doesn’t tell you how one has a personal advantage to you over the other, does it? So I dig right into it, because I find the advantageous difference exciting. I am that side of geek 😉
Here’s the simple definition I give my clients. I can literally see the sun come up on their faces when they get it.
A stock company is indeed made up of stocks. Let’s go one step further: who owns those stocks? Why the stockholders of course! So basically, the stockholders own the company. Owners like to see profit. Profit comes by way of what is called a Dividend: surplus money left over after all the expenses for the year have been paid and expenses for the upcoming year have been anticipated. The stockholder is entitled to receive a dividend every year. This is not guaranteed, because as we know about business, maybe there is no profit at the end of the year. But when there is and dividends are distributed, there is a hierarchy that occurs in a stock company.
First, the preferred stockholders receive their piece of the profit. They are preferred because they paid more money into the company to buy into that privilege of receiving profits first in line. Yes, not a typo, a LINE of recipients. Next the common stockholders get their piece, then, IF anything is left in the profit pot, the policyholders receive a dividend to help grow their policies. Being last in line, how good do you feel about the value of a policy’s ability to grow well?
A mutual company, on the other hand, is owned by…(drum roll please)… the policyholders! There is NO LINE to receive dividends. Everyone gets a dividend distribution if there is one for the year as it is not guaranteed.
So, the bottom line is: if you are in the market for a whole life policy which has a cash value component, and/or a long term care policy, it is best to go with a mutual company for these. A whole life policy will gain greater dividends which can be used to eventually pay for the policy’s premium. A long term care policy’s dividends can be used to offset the premium. And let’s notice that historically, it has been the mutual companies that are able to maintain and grow in the long term care sector, without raising rates. They are using the dividends to offset this inflationary cost of care when claims are made on the policies. A stock company generally cannot keep up and raises rates.
Hancock was allowed to raise rates in 2008 as much as 13% (http://www.startribune.com/business/134148318.html?page=1&c=y) and in 2010 10-40% depending on your state of residence. This year they are requesting a rate increase as high as 40%. These increases on are top of each other, not the original purchase premium. Genworth is seeking an 18% increase (http://money.cnn.com/2011/01/24/pf/long-term-care_insurance.moneymag/index.htm) and let’s remember that this company is less than 6 years old. GE separated from Genworth officially in 2006 which completely changes the game for this company (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aZB598srhOvk&refer=us)
And while some stock companies are solid and pay the claims, so can a mutual company, but with a major difference I find extremely important to point out to my clients. Although not contractually guaranteed, most mutual companies have not and do not plan to raise their long term care premium rates. When necessary, they come out with a new plan every few years that adds benefits to keep up with the changes in the care industry and the premium is a little higher for the newer plans, while the older plans maintain a level premium.
In my opinion, I appreciate the forethought and love the idea of stable rates. My clients do too.