When considering buying insurance, it’s easy to be overwhelmed with information.

You likely have heard of mutual and stock insurance company options, but might not know the difference. It is not always immediately clear, but it has important implications for your life insurance policy decision.

It’s true that both types serve the same general purpose: selling insurance to consumers. Both forms earn income in the same way: collecting premiums from their policyholders.

When the premiums brought in exceed money paid out in claims and other expenses, the company profits. This is the primary method of income for life insurance companies.

Both types of companies also earn income through investments. But the company’s organization—and thus, their investing strategies—is where they differ.

There are so many terms thrown around in the insurance industry that you may not know where to start.

But one of the most important differences to understand is between a stock insurance company and a mutual insurance company, and how they will affect your life insurance policy.

For more information on the differences and their respective advantages and disadvantages, keep reading. 

Stock Insurance Company

A stock life insurance company is a public or private organization. It is shareholder-owned. In publicly traded companies, these shares get traded on the stock exchange.

Profits are then distributed to shareholders in the form of dividends. Otherwise, the company can pay debts or reinvest profits back into the business.

As its primary goal is to earn profits for shareholders, these companies tend to be under investor scrutiny. As such, they are more likely to focus on short-term results. They tend to use more high-yielding (and thus, riskier) investment strategies.

Pros of a Stock Insurance Company

One important benefit that sets a stock company apart is how it raises capital from market equity. Especially in times of financial stress, this can be a game-changer as compared to a mutual insurer. 

Plus, when needed, the company can sell shares of stock on the market. This raises cash in a way mutual insurance companies cannot.

Cons of a Stock Insurance Company

With stock insurance companies, one drawback is that more control goes in the hands of shareholders, rather than policyholders.

With differing goals, the views of these two groups are not always aligned. But under this business model, the shareholders win out.

Mutual Insurance Company

A mutual life insurer is a company “owned” by mutual insurance policyholders.

This ownership is not transferable. This means it sticks with the policyholder. They cannot sell it like with stock insurance companies.

Surplus funds may get distributed to policyholders in the form of dividends. Otherwise, the insurer can hold these monies in exchange for reducing premium costs.

These companies aim to maintain capital, rather than raise it, to meet policyholder needs. As policyholders are less concerned with the financial performance of the insurer, they focus more on long-term results. 

With this in mind, mutual insurance companies are more likely to use conservative, low-yield investing strategies.

Pros of a Mutual Insurance Company

While a mutual insurance company cannot sell stocks to raise capital, they are also not held up to Wall Street expectations as stock companies are. They do not have to worry about meeting shareholder targets.

There is also more internal control on the part of policyholders. They have a greater voice in voting on some internal decisions, like management personnel or policy decisions.

In fact, mutual insurance policyholders elect the company’s board of directors and have a say in insurance products that companies offer.

Cons of a Mutual Insurance Company

As mentioned earlier, mutual insurance companies do not trade shares of stock on the market.

As such, they cannot use these means to raise capital in the same way. While mutual companies can raise cash on the credit markets, this is not always reliable and averages a far lower profit.

Plus, mutual companies do not have the ability to sell shares to raise capital as stock companies do.

This can have implications on the ability of mutual companies to pursue certain growth objectives. With less financial flexibility, it becomes more difficult to make deals like mergers or acquisitions.

When these companies need to raise money, they must choose between borrowing the funds or increasing insurance rates.

Which Is the Best Option for Me?

These factors differentiate stock and mutual companies. They influence each company’s operating, underwriting, and insurance-selling abilities.

They must be carefully considered when deciding on the best life insurance policy for you. For most life insurance companies, a stock insurance company may be a better option.

These companies have three main streams of income: premiums, investments, and stock sales. It is much easier for these companies to raise capital when needed.

This means the company is less likely to go into debt or raise their insurance premium rates to increase income. Their ability for greater financial stability can be very attractive to potential policyholders.

This is especially true if you foresee borrowing against your policy in the future.

When weighing your decision, it’s best to consult the advice of experts in the field. Speaking with a trusted life insurance agency can help you better make sense of your options and determine which is the best for you.

Finding the Right Type of Insurance Company

Now that you have narrowed down the best type of life insurance for you, it’s time to decide which life insurance agency to go through.

Consider TopWholeLife for your life insurance needs. Our team of expert advisors can review your profile and help determine if mutual or stock insurance company policies are the best for you.

Contact TopWholeLife for more information or for a free quote today!

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