Mutual Companies vs Stock Companies: Does it have to be a Mutual Company for Private Banking?

Introduction 

Since one of the goals of this site is busting myths and misconceptions about life insurance, I wanted to address the myths propagated by those promoters who insist that private banking strategies like, infinite banking concept, for example, need to be done with dividend-paying whole life policies from mutual companies that have been around for 150 years or more. Just think rationally for a moment: do you really think that the ownership structure of an insurance company determines whether or not it can be used for private banking strategies? Or that it is best for private banking strategies?

For the record, most of the policies that I write are from mutual companies. But, nonetheless, I want to address this myth that private banking strategies must use a mutual company.

Goal 

The goal of this post is to explain the difference between mutual and stock companies and show you why the ownership structure of an insurance company doesn’t matter. In addition to that, I want to show you what factors you should be looking at when you are evaluating a policy to use for The Double Play.

So if this sounds interesting to you, keep reading.

What is the difference between a mutual and a stock insurance company?

The primary difference between a mutual insurance company and a stock insurance company is the ownership structure. A stock company is owned by shareholders. A mutual company is owned by the policy owners. It is very easy to find hundreds of articles on the difference between these two types of companies. Our concern, however, is whether or not you need to use a mutual company for private banking strategies.

Let’s start with some intangibles:

This screenshot is from Investopedia. Notice how it states “many people feel mutual insurers are a better choice” and “They feel there is no conflict between the short-term financial demands of investors and the long-term interests of policyholders”.

That’s great that people “Feel better”. I want facts and data. Are they truly a better choice? Is there any proof of that?

I don’t want to choose a policy because people “feel” like it is a better choice. I want to choose a policy because I KNOW that it has a lower internal cost structure, for example. I want to choose a company whose reserves contain a safer mix of assets, for example. I need those feelings to be quantified.

What are the requirements for Private Banking Strategies?

Private banking strategies simply require a permanent life insurance policy. The state statutes in all 50 states have language requiring that insurance companies must make loans to their policy owners secured by the cash value of those policies. Alternatively, the cash value of a life insurance policy can be assigned as collateral for a loan from a third party lender.

This means that it doesn’t matter if it is Universal Life or Whole Life. It doesn’t matter if its a Mutual Insurance Company or a Stock Company. It doesn’t even matter if it is an optimally designed policy.^[1] Private banking strategies work with any permanent life insurance policy.

The type of permanent insurance and the ownership structure of the company do not play any role in private banking strategies.

Are there differences in dividends or costs?

Yes.

There are differences in costs and Dividends (crediting) between most companies and policies. But those differences in dividends and costs may or may not have anything to do with the ownership structure of the company. Again, you may “feel” that a mutual company should credit a higher dividend than a stock company, but does it? Not from what I’ve seen running hundreds, if not thousands of illustrations. What you “feel” doesn’t always manifest itself in the actual performance. There are stock companies that credit more to the cash value than mutual companies. There are stock companies with a lower fee structure than mutual companies.

Insurance company motives 

This is a graph you may have seen in other blog posts or my YouTube videos. The graph looks at the cash value and death benefit for a traditional, minimally funded life insurance policy. Again, this can be a whole life or an Indexed Universal Life. It could also be from a mutual company or from a stock company.

In any permanent life insurance policy, the cash value represents the policy owner saving up the death benefit for the insured over the insurance life expectancy. In the beginning, the insurance company bears  the risk of paying out the death benefit. But over time,the cash value accumulates and the amount of risk to the insurance company goes down.

It is important to understand that the insurance company has an incentive for the cash value to grow as quickly as possible. You can see that the amount of risk in the policy goes down as the cash value increases over time. This is true whether the company is a mutual company or a stock company. It is also true whether it is a whole life policy or an indexed universal life policy.

It is also important to look at this from an economic perspective. A policy from one company is virtually identical to that from another company. All life insurance companies must make the pricing of their products competitive in order to capture business.

So how should we choose a policy? 

I’ve personally whittled down the list of products I use to just a handful that I use when I’m working with a client. What matters to me is not whether or not the company is mutual or stock. It is whether or not I can get the riders that I need and a design that maximizes cash value.

What matters to me?

• Can I waive the surrender charges?
• Can I get a variable loan right away?
• Are the loans Non-direct recognition?
• What do the reserves look like? What assets does the company hold?
• What are the interest-crediting options? (IUL Only)
• What are the cap rates? (IUL Only)
• What is the internal fee structure?

You should understand that if you set up an illustration with multiple companies, and you hold the interest-crediting rate the same, then any differences in the projected policy performance are due to the internal charges. Everything else should be the same. Same premium, Same insured.

It’s also important to recognize that illustrated crediting rates are just assumptions. That means that the crediting rates may be higher or lower in reality. The relative cap rates can tell you if one company is likely to do better than another with lower cap rates. Some companies, like Allianz, do all of their hedging in-house. This should give them a competitive advantage over companies that farm out the hedging to Wall Street firms. Does this have anything at all to do with the ownership structure of the company? No.

One thing you should be aware of is the underlying risk of the company’s assets. I personally don’t think that  ratings tell the whole story. Just watch the movie “The Big Short” to see what I mean. What you should do is look up the annual reports for a handful of companies. You should be able to find a pie chart showing the asset class makeup of the reserves. Insurance companies aren’t supposed to be risk takers. The bulk of the assets should be in AAA rated debt instruments. You have a right to be concerned if it looks like the insurance company is carrying too much risky debt.

When you compare the asset mix of several companies, you can tell if one company is taking on more risk than another. If you see more lower quality debt (below AAA-rated), the company has riskier holdings. Generally, lower-quality debt commands a higher yield to provide an incentive to buy it. Higher risk = higher potential returns. A higher return on their reserves, would give them more resources for hedging, and caps could be higher for that reason. But if those high returns are from lower quality debt, there is default risk.

Conclusion 

The goal of this post was to explain the difference between mutual and stock companies and show you why the ownership structure of an insurance company doesn’t really matter. I briefly covered the primary difference between Mutual companies and Stock companies. I also described what I look for in policies and how I compare illustrations and the underlying companies. Spend your time looking at what really matters and not the hype of internet promoters.

^[1] It is best to use a Maximum Over-funded, permanent life insurance policy for The Double Play. Learn why here: https://innovativeretirementstrategies.com/Blog/minimum-and-maximum-over-funded-life-insurance-policies/