Who owns your insurance company? It matters to your wallet

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Q. What’s the difference between a mutual life insurance company and a regular life insurance company?
— Curious

A. Yours is a great question, but a little technical. Here’s the deal.

The answer to your question lies primarily in who owns the company.

Insurance companies, including life insurance companies, are generally owned in one of two main ways, either by external investors – stockholders – or by their policyholders, said Gene McGovern of McGovern Financial Advisors in Westfield.

He said a stock life insurance company receives capital by issuing shares of stock that are often publicly traded, such as on the New York Stock Exchange.

“The stockholders receive an ownership stake in the life insurer, can vote for the company’s board of directors, and share in the company’s profits when they receive dividends on the stock,” McGovern said. “Examples of major stock life insurers are MetLife, Prudential Financial and Aflac.”

A mutual life insurance company, by contrast, is owned by its policyholders, not by shareholders. The policyholders elect the board of directors for a mutual company, McGovern said.

“Profits earned by mutual insurance companies are returned to the policyholders in the form of nontaxable dividends or reduced premiums,” he said. “Examples of leading mutual companies are New York Life Insurance, MassMutual and Northwestern Mutual.”

Unlike dividends from a stock life insurer, which are taxable to shareholders like other corporate dividends, the dividends paid by a mutual life insurance company to policyholders are nontaxable because they’re treated for tax purposes as a reduction in policy premiums previously paid, McGovern said. Mutual company dividends reduce the policyholder’s basis, fr example, the amount of his or her investment in a cash value life insurance policy.

“Over time, a number of mutual companies have converted to stock companies, including Prudential and MetLife,” he said. “A frequent reason for the change is raising capital to fund growth.”

Stock insurance companies now comprise the majority of the U.S. insurance industry, he said.

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