Who are they beholden to? In this episode, I'm going to address the question
what's the difference between a stock and a mutual insurance company? Get ready. Sometimes
people don't understand the basics behind each of those 2 types of insurance institutions.
So, my name is Doug Andrew and what do I know? Well, I've had an insurance license for more than 4
and a half decades. I actually got my insurance license clear back in 1974. Yeah, I'm pretty old. My
first pet was a dinosaur, okay? Now, the difference between insurance companies that are mutual
or stock, and actually that's not the only 2 types of insurance companies,
those are the 2 that I'm going to talk about mostly in this episode.
There are actually maybe ESOP type companies and those are owned by the employees at
the insurance company. So, it's like an employee stock ownership type of a plan and there's also
captive insurance companies and I will not go into details on those captive insurance companies, they
operate different than the normal stock or mutual insurance companies. So, what is the difference
basically between those 2 other than they're spelled differently? Now, before I go any further,
if what you hear here is intriguing, be sure and share it. Click like, subscribe, be sure and click
on that little bell so you'll be notified because I answer an in-depth financial question almost on
a daily basis on this channel and at the end, I want to gift you a free copy of my most recent
best-selling book called The Laser Fund. Now, don't pay $20 retail, I will gift it to you, okay? In a nutshell,
a stock insurance company is more beholden to the stockholders. Those are people who
own stock in the company, you can own stock in an insurance company without ever having
insurance that you own in that insurance company, okay? It's owned by the stockholders just like most
corporations in America, that's a stock company. In contrast, a mutual company is mutually owned by who?
The policy holders, okay? So, in a mutual company, they're more beholden to the policy owners because
the policy owners are the ones who get a piece of the profits or the dividends or what have you,
instead of the stockholders. Now, before you make any judgments, I'm not here to say which one is
better, but you need to understand the difference between stock and mutual. Mutual is owned mutually
by the policyholders, stock companies are owned by the stockholders, okay? So far so good. Let's go into
a little bit more about each of these types of insurance companies and what that means for you.
So, an insurance company, a legal reserve insurance company, whether they offer all kinds of insurance
from auto, homeowners, property and casualty is what it's called or they focus on health
insurance or life insurance, let's just talk about life insurance right now because it's probably
the simplest. Instead of paying a premium like for car insurance or health insurance and then
when you have a claim, you're going, "Is that covered? Is that covered?" that's a little bit
ambiguous and so life insurance is pretty cut and dried. Now, I've always used life insurance
for life, okay, for living benefits, so that way you're taking out an insurance policy primarily
for the purpose of using it for tax advantaged growth of your money and tax-free income
when you retire. You're using it to live off of and if you structure it right, in many of my episodes, I
show you that it knocks the socks off of putting the same amount of money into an IRA or 401k
that's going to be taxed at the end of the day and it's even better than a Roth IRA or 401k
because they only have 2 benefits and a maximum funded insurance policy has 6
benefits, the 2 of a Roth and 4 additional benefits. So, that's why I say, "You know what? I've
never owned an IRA or 401k and I never will. I've never owned a Roth IRA or 401k and I never will."
Why would I when I can have all the benefits of those and a whole bunch more by having a
laser fund? That's what I label as a maximum funded insurance policy, but let's go back to okay, which
company? Now, I've actually owned universal life from stock companies and mutual companies, both.
Stock companies, they are trying to manage their profits. How does an insurance company do that?
They bring in the premium dollars and they manage that and they try to mitigate risks by making
sure that if you apply for life insurance, in this example, that they screen out the people who have
a poorer lifestyles who already have one foot in the grave or whatever, those are uninsurable.
So, they're trying to lessen the risks unless you have a group life insurance policy through work
and they put everybody into that and everybody pays for the unhealthy people and so forth. But
an insurance company is trying to manage the money that is paid in so they'll have it on hand
if somebody dies or there's a catastrophe or what have you and so they want to have the cash on
hand. So, many times they bring in more money and then if they invest it carefully and properly,
which most insurance companies do, they usually are very conservative. They'll put money in triple A
and double A bonds. If they loan money on shopping malls and skyscrapers, it's usually only 50% loan to
value so if they have to foreclose, they usually come out smelling like a rose because they make
money, okay? Insurance companies are the backbone of America and the backbone of the world. This is
where many banks and credit unions will take your money that they pay you a measly 1% on
right now and they'll turn around and put 30 to 40% of their tier one assets, that's money
that they want on hand liquid and safe in case of a lot of claims coming in, they put it into
insurance companies. Banks and credit unions borrow our money at 1, they put in insurance
companies and earn 5. They earn 5 times what they're paying us. They earn 50,000
on every million they put into an insurance company and they only have to pay out 10000
to the people who deposited money in their bank, that's a pretty good deal, right? You can
bypass the middleman and put money straight into the insurance company. So, I have taken out life
insurance policies as I indicated with both stock and mutual, so what's the difference? What happened?
As these insurance companies bring in the premium dollars and they invest it, they have their general
account portfolio rate. And so, they may earn during high interest times like in the 1980's
and 1990's, insurance companies were earning 8, 10, even 15% on their general account portfolios
because mortgages were at 18 to 20%. CD's at banks back then were paying 10.
During low-interest environments, like we have right now at the recording of this episode, a lot
of insurance companies might earn 4 or 5 or 6%, that's why when I have my money
in the insurance company and I begin to build up cash value of 100,000 or half
a million or a million dollars by the time I'm ready to retire let's say. That million,
I can just settle for the general account portfolio rate of let's say 5%. If
the insurance company is earning 5, they usually need 1 of those percentage points for them and
so the net would be 4. You know, I could pull out 40,000 a year tax-free and not deplete principle,
that's sort of typical in the financial services industry or with indexed universal life, I can take
that interest on my million and give it to the insurance company to use as an options budget
and they will pay me whatever the index or indices that I choose, this is called index universal life,
and they'll credit me and I've earned 8 and 12 and 16% and 25% and more because I am linking my returns,
okay, to an index. If the market goes up, I benefit but if the market goes down, my million is still
safe in the insurance company earning 4 but I gave up the for sure 4. Does that make sense?
So, you don't lose. You may not make very much with the market crashes but you don't lose. If I just
leave my money in that general account portfolio, I'm relying on the insurance company to earn
let's say 5 and net 4 and so that's their cost that's their profit and if they are keeping
an extra piece of that for their stockholders, if they're a stock company, they want to make sure
they pay dividends out to the stockholders because that's what they're supposed to do.
And so, I found sometimes I don't get quite as good of a net internal rate of return with some
of the stock companies. With a mutual company, many times, it is mutually owned by the policy holders
and so that money comes back in a credit or a dividend to the actual insurance policy owner.
So, there have been many times when I've structured these that I have actually achieved a little
bit better rate of return with certain mutual insurance companies, but it's not just are they
stock or mutual. It also depends upon their product, are they stingy, are they generous, do they have a
very good portfolio? And there's probably only about a dozen insurance companies that I would
recommend you put money into for living benefits. So, it's more than just are they stock or mutual,
now you know the difference basically between the 2. If you want to learn more, see the difference
between not only how a stock company may perform versus a mutual company, but frankly, how their
products are structured and how you fund it will make all the difference in the world. That's why I
point my students to professionals who understand how to structure them correctly and help you fund
them properly so they turn into a tax-free cash cow at the best net internal rate of return. So,
if you've been watching and going, "Whoa!" and you're curious, I would strongly recommend
you empower yourself by learning. I'm passionate about giving people insights into opportunities
that maybe they didn't know existed before. So, if you'd like to learn more about concepts like
this and what I referred to, indexed universal life is my favorite vehicle because I've been
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it's what I call the Laser Fund which stands for liquid asset safely earning returns.
This is how you can diversify and create the foundation for tax-free retirement. You'll see
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not even show up on their 1040 tax return because they're using Laser Funds. So, it's
actually 2 books in one. This side is 200 pages, 14 chapters with all the charts and graphs. If you
flip it over to this side, 12 chapters, 100 pages with 62 actual client stories of how the Laser
Fund is used for all kinds of financial goals, I call it the dream solution, the Financial Swiss
Army Knife. If you go to laserfund.com, contribute a nominal amount towards the shipping and handling,
I'll cover the rest of that cost, I'll buy the book. I've been sending out more than 500 of these a
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there to listen and learn, watch and learn if you want to go deeper. Here's to your brighter future.