Whole Life: What Kind of Company?

There is a better way than the publicly traded insurance companies
There is a better way than the publicly traded insurance companies

First, you should understand that there are two major types of life insurance companies.  Most (all?) companies used to be Mutual’s.  A few decades ago, it became popular for many companies to “go public.”  Which meant becoming Stock companies with their ownership publicly traded on an exchange.

Mutual companies are owned by thier Whole Life policy holders.  They have no stock holders.  In other words, owning a whole life insurance policy with a mutual insurance company is like holding stock in that company because you are its owner and share in its dividends much as a stock holder enjoys these privileges with a stock company.

You should only consider buying whole life insurance from a good Mutual Insurance company.  Let’s look at why.

When the decision makers for a publicly traded stock company are making operations decisions for its company, who do you think it most aims to please?  Their policy holders?  Or their stock holders (owners/boss) who they must make a report to each quarter?  The answer is obvious:  they report to their boss – the owners/stockholders.  The people who run these companies are incentivized to make decisions which might help the short term profits of the company, but which could hurt the long term strength of this same company.  They have a different agenda from you, the policy holder who is depending on this company to be a strong part of your financial plan 50 years from now.

A Mutual Insurance company reports to its policy holders who are the owners of the company.  They have no other parties which they are trying to appease.

I’ve been told that when the CEO of John Hancock took it public, he personally made $500,000,000 (not verified).  That’s a lot of wealth to transfer from the policyholders to the CEO!  As this is being written, publicly traded (Stock) insurance companies are making all sorts of headlines.  The biggest of these is AIG, who needed the government (your money) to bail out their horrible financial games.  Several others are also in very difficult positions.  The companies that we work with are standing strong in this current environment due to the sound long term financial decisions they have made.  These are the types of people and companies that you want to be working with when planning long term decisions based on your life.  (This is not as important for shorter term property insurance decisions because they can be changed at anytime, although it’s conceivable that they could have a problem right as you are having a problem).

Whole Life: How does it work?

So a Whole Life insurance policy through a Mutual Insurance Company is ownership in that company.  The company collects premiums from you and all the other policy holders.  These assets are invested conservatively.  Over the course of the year, operational costs are paid, and death claims are paid.  At the end of the year, the company declares a dividend based upon this profit.  Good companies have paid dividends every year, decade after decade, no matter what is happening in the economy.  After a certain number of years (perhaps around 15) the policy reaches a point where the policy holder can choose to stop making premium payments.  It is self supporting.  This is not usually in your best interest, but it is a possibility that sometimes makes sense.  We’ll cover the way in which the tax advantaged cash value grows when we discuss the Trunk (Savings) of your Fruitful Tree.  At this point, we are going to focus on the death benefit.

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This post is _Part 10_ in the series The Rock.  To continue with this series, click on Pt 11.  To use this as a growth tool, you might start by reading Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6, Pt 7, Pt 8 and Pt 9.

Photo credit: Barrybar

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