What does an ownership interest in a mutual company actually give me?

How it works

A mutual life insurance company has no share capital, so nobody owns it in the way shareholders own a stock company. The ownership interest belongs instead to its participating policyowners, who are its members. Holding a participating policy issued by a mutual is what makes you a member, and the membership lasts as long as the policy does. Each part of what that membership gives you is worth understanding on its own, because each one is narrower than the word ownership suggests.

The first thing: membership and a vote

the designation exists to avoid the estate

Why a contingent beneficiary matters

1. What happens to the proceeds if the primary beneficiary cannot receive them?
2. They receive the proceedsA contingent is named. The designation carries the proceeds past the estate.
3. The proceeds generally fall into the estateNo contingent is named. An estate exposes them to delay and cost, and creditors of the estate may then reach them.

As a member you have the voting rights that the company's bylaws and the governing legislation provide. In general terms that means the right to receive notice of meetings of members, to attend, and to vote on the matters put to members, including the election of directors. Directors are the people who oversee the company's management and who approve, among other things, the policy dividends declared each year.

How much weight a single vote carries is a fair question. A mutual may have hundreds of thousands of members, and the practical effect of one member's vote on any single decision is small. The right matters less as a lever than as a structure: the people the board answers to are policyowners, not investors. Whether votes are counted one per member or in some other way, and whether they can be cast by proxy, is set out in the bylaws, which is one of the reasons to read them.

The second thing: eligibility for policy dividends

A participating policy is eligible for policy dividends, also called participations, declared from the company's participating account. The account records the premiums, claims, expenses and investment results of the participating business, and the board declares each year what to distribute based on that account's experience with mortality, expenses and investment results, measured over long periods rather than repriced day to day.

Eligibility is the right word. A policy dividend is declared, not guaranteed, and the amount can go down as well as up. What you are entitled to with certainty is what the contract guarantees: the guaranteed cash values and the guaranteed death benefit written into the policy. The dividend is a share in favourable experience when there is some, decided by the board.

The third thing: a company run for its policyowners

five components, each behaving differently

What a participating contract costs

1. 01The mortality chargeBuys the death benefit.
2. 02CompensationWeighted to the first year.
3. 03Policy and administration feesGenerally stated.
4. 04Provincial premium taxAlmost nobody mentions it.
5. 05Loan interestOnly if capital is actually accessed.

Because a mutual has no outside shareholders, there is no separate class of owners whose interests compete with the policyowners' for the company's earnings. In a stock company, earnings from participating business may be shared between the participating account and shareholders within limits the legislation sets. In a mutual, the company's surplus is held for the membership as a whole.

That is a structural feature, not a promise of better results. A mutual can be well or badly managed like any company, and its policy dividends depend on the same experience factors as anyone else's. What the structure removes is one competing claim on the results. It does not remove the need to judge the company on its financial strength, its expense management and its record of dividend declarations over time.

Where membership sits among the four roles

This site describes four roles that money plays in any financing arrangement: the Saver, the Borrower, the Participant and the Administrator. Membership in a mutual touches only one of them. It gives form to the Participant, what a bank calls its shareholder, because it makes the policyowner eligible to share in the results of a pooled account without owning shares in anything. It does nothing for the other three. Funding the contract is the Saver's role, borrowing against its value is the Borrower's, and deciding what to finance and on what schedule to repay is the Administrator's. None of those depends on whether the company is a mutual, and none of them is exercised at a meeting of members. A policyowner of a stock company plays the same Saver, Borrower and Administrator roles on the same terms. What membership changes is who else has a claim on the results, not what the policyowner does with the contract from one year to the next.

The cost or the catch

five products, one decision

The permanent and temporary contracts

1. 01Term, coverage for a fixed period and no cash value
2. 02Whole life, permanent with a guaranteed cash value
3. 03Participating whole life, which may receive dividends
4. 04Universal life, where the owner carries more of the decision
5. 05A life annuity, capital exchanged for income for life

The ownership interest is not a financial asset you can use. It has no market value, it cannot be sold, pledged or transferred on its own, and it pays nothing apart from the policy dividends the contract is eligible for. It ends when the policy ends, whether the policy is surrendered, lapses or matures as a claim. A reader who pictures membership as a stake in the company's net worth will be disappointed: the surplus belongs to the company, held for the benefit of members collectively, not divided into personal shares.

The only moment when the collective interest has historically turned into something individual is a demutualization, when a mutual converts into a stock company and eligible members are compensated under a plan approved under the legislation. That is a rare event, decided by the company and its regulators, and it is not a reason to choose a mutual.

What can vary

The details differ from one mutual to another. Bylaws set how members are notified, how meetings run, how votes are counted and who is eligible to vote. Participating account management policies and policy dividend policies differ in how experience is measured and how gains are smoothed from year to year. Contracts differ in their dividend options, such as buying paid up additions, reducing premiums or taking cash. Two participating policies from two mutual companies can therefore give quite different practical rights, even though both make you a member.

What to ask, and of whom

where the structure usually goes wrong

Corporate-owned life insurance

1. 01The company owns the contract and pays the premium
2. 02Premiums are generally not deductible
3. 03The advantage lies in the rate the premium was funded at
4. 04A benefit received credits the Capital Dividend Account
5. 05Ownership and beneficiary structure is where it fails

Ask the insurer for its bylaws, or the extract setting out members' rights, and for its participating account management policy and its policy dividend policy. Ask how members are notified of meetings and whether proxy voting is available. Ask for the history of the dividend scale over a long period, not just the current one. The licensed professional presenting the contract should be able to point you to each document, and the insurer's policyowner services can supply them directly.

Who this matters to most, and least

It matters most to a policyowner who wants to understand whose interests the company is run for, and to anyone weighing a mutual against a stock company on structure. It also matters to anyone who has been told that membership is a financial benefit in its own right, since the practical benefits run through the contract and its declared dividends rather than through the membership itself. It matters least to a household focused only on the guaranteed values, which are the same obligation whichever form the insurer takes.

What this page will not tell you

This page describes membership in a mutual company in general terms. It cannot state the rights in a particular company's bylaws, predict any company's future policy dividends, or tell you whether a mutual or a stock company is the better choice for you. Those depend on the company's own documents and on advice given for your circumstances.