Mutual Insurer
- policy-holders own the company/ elect board of directors
- profits to policyholders
- participating policies (premiums slightly higher)
- Dividends not taxable (return of premium)
MR. WATSON: A Mutual Insurer does not have any stockholders. So who owns the company?
STUDENT: The insured.
MR. WATSON: No, not the insured. The policyholders own the company. Under a mutual company the policyholders own the company. All profits left over at the end of the year go to whom? Policyholders. Does that make sense? So what kind of policies do they sell?
STUDENTS: Participating.
- Stock companies sell non-participating and participating policies,
- Mutual companies sell only participating policies. Any money left over at the end of the year under a mutual company goes to policyholders.
MR. WATSON: Who elects the board of directors for the mutual company? Policyholders, because there are no stockholders.
MR. WATSON: So a stock company might charge you $100 for a life insurance policy. A mutual company might charge you the same $100. But to cover any unexpected expenses, they tack on an extra $20 on top of it. What's that extra $20 do? It covers unexpected contingencies. It covers “if's”. Therefore, if something unexpected should happen, we'll use that 20 bucks to cover it.
MR. WATSON: What happens if those unexpected contingencies do not happen? What do the insurance companies do with the extra 20 bucks? They return it to the policyholders in the form of a policy dividend. Tax Free!
MR. WATSON: Anybody drive through a toll booth today?
STUDENT: Yes.
MR. WATSON: Now, you gave them a dollar. Do you remember?
STUDENT: I gave them a dollar.
MR. WATSON: You gave them a dollar. Now, they gave you a quarter back because it was only 75 cents. Do you remember?
STUDENT: Yes.
MR. WATSON: Does she have to pay taxes on that 25 cents they gave her back?
STUDENT: No.
MR. WATSON: Why? It's change. If you go to the grocery store and you buy groceries for $80 and you gave them $100, and they give you $20 back, do you have to pay taxes on it? No. Because it's change.
MR. WATSON: The IRS says that the dividend they gave back to you is change. It's a refund. It is a return of your money, not a return on your money. In our business, we call it a dividend.
MR. WATSON: So dividends with a mutual company go to policyholders. Are they taxable or nontaxable?
STUDENTS: Not taxable
MR. WATSON: Why?
STUDENT: It's a return OF my money.
MR. WATSON: Do you understand?
STUDENTS: Yes.
MR. WATSON: Dividends: What are they? How do you get a dividend from a mutual company? They charge you more money up front, again, to cover unexpected contingencies. Do you agree?
STUDENT: Yes.
MR. WATSON: Do you agree that a mutual company, even though they are charging you more money, could --could -- eventually cost you less money, and they will give you money back?
STUDENT: Yes.
Demutualization
MR. WATSON: Some mutual companies de-mutualize, a process called demutualization. They transfer ownership from the policyholders to stockholders. They become a stock company.