What is a mutual insurance company, and why does it matter to you as a cash value life insurance investor? Even more so, what are these companies doing for your financial strategy that other investments and organizations simply can’t offer? Join Patrick Donohoe as he discusses the value a mutual company’s structure brings to your financial strategy.
Key Takeaway Timeline
0:20 – The history and traits of mutual companies
1:20 – The value and benefits of mutual companies’ private structure
4:26 – Why we use mutual insurance companies
6:10 – How dividends work
7:20 – How mutual companies operate and behave, and on whose behalf
What are mutual companies and why do they matter to you? Even more so, what are they doing for your financial strategy that other investments and companies simply can’t offer? Let’s dig in. Mutual companies date back to the 1600s, believe it or not. There’s quite a history there. Benjamin Franklin was the first to establish a mutual company in the United States. Surprisingly enough, it is still in business now. The term mutual means that the company is owned by specific policy owners, what are called participating policy owners. Mutual companies are, in essence, for-profit companies that offer many different insurance products and other financial products. It’s evolved over the years. Some mutual companies don’t have what are called participating policies, policies that pay a dividend. These mutual companies, what they’ll do that don’t have these participating policy owners will reduce costs, improve service and give an overall better experience. That, in essence, has some value. We don’t necessarily find it the true value in a mutual company unless there’s a participating policy. Participating policies, which are what I’ve seen mainly whole life insurance and disability insurance, will pay a dividend that is similar, synonymous to a profit share. By the IRS, it’s treated as a return of premium or a refund of charging too much. This is not treated as any taxable income and insurance companies. Mutual companies existed before 1913, which is when the personal income tax went into effect. Mutual companies have been around for a long time for a number of reasons. There are companies now that exist. They are hundreds of years old. In large part, it has to do with the way in which they make decisions. They are not necessarily bound by short-term constraints like public companies are, so mutual companies are private companies. When it comes to the short-term nature of most public companies, they are essentially incentivized or held accountable on a quarterly basis to show profits, to show growth. If they don’t show that, the prices of those stocks, of those companies, the share price goes down or goes up. There’s a very short-term nature when it comes to publicly traded companies. When it comes to mutual companies because they’re private, they can make certain decisions now that may have some short-term downsides. However, looking out for the best interest of policy owners may require making decisions that ultimately will allow them to pay claims, pay dividends, and be in a healthy situation.
In the book that I wrote, Heads I Win, Tails You Lose, I talk about an example of a company who used one of the recessionary periods over many years to capitalize on some real estate projects in the Northeast and were able to get that land at a fire sale discount because they had cash. Publicly traded companies, if they have too much cash and they’re not investing and getting that money moving, that could potentially look bad. That’s one example of how a mutual company can capitalize on not needing to appease shareholders on a short-term basis. The book explains the outcome of it, but this specific company was able to partner with a development company and 10x the investment or part of the land that they bought was 10x investment based on what they sold it for. There are lucrative deals that typically come about at various times, sometimes at good times, mostly in bad times. The mutual company is in a position where they can capitalize on those types of deals, make those types of decisions. If you look at why we use mutual companies, number one, I would say it’s the stability. The wealth maximization account, a high cash value insurance policy is meant to be the foundation of your financial life. It takes the place of a safe bond fund. It takes place of cash. Sometimes gold if you’re using gold for liquidity purposes or safe purposes, not necessarily to hedge inflation purposes but life insurance, high cash value policies will allow you to have that stability at the foundation of your life. The last episode we did with Justin Atkinson was awesome. I love talking to Justin because his mindset is so in tune with how to have a healthy financial life and having that foundation of certainty is paramount to the things that are thrown your way when it comes to finances, whether it’s a change in your company or a change in your business or a change to the economy, having this stability is vital. Mutual companies are very sound. Every year, they will release an annual report that you can read. There are usually statements from the executive team and it talks about what they’re up to, what they’re doing, what they’re committed to, their principles and their mission. Also, other reports come out where you can see their financial statement. You can see what they’re doing financially, what investments they’re making, how they’re adjusting this, that, and the other. We pay attention to that, but insurance companies make good, prudent decisions when it comes to money and investments.
It’s awesome to see because it aligns with how we view the purpose of the wealth maximization account. How dividends work, let me go to that. Dividends are declared once a year and it’s typically toward the end of the year, November or December. Each mutual company has a board and that board gets together a few times a year. In the last part of the year is when they decide what the dividend declaration should be. When it’s declared, that’s when it’s not necessarily paid out. It’s ultimately declared what will be paid out. The subsequent year, you will essentially receive your dividend associated with your policy on the anniversary date of your policy. If you started in February, that is when the dividend will be paid out. If you started in November, that will be when it’s paid out the following November or the following December. The end of the specific year is when the dividend is declared. The subsequent year, that next year is when the dividend will be paid on your policy anniversary date. That’s sometimes a question we get from clients. Mutual companies, it’s been awesome to have relationships with a few of them. We do business with multiple mutual companies. It’s great to see how, number one, they think they act the decisions that they make for the best interest of those that have essentially given them money in the form of insurance premiums. It’s been great to get to know them and their principles, understand their mission. They’re very similar. What’s also healthy is their collaboration with each other. Most companies out there look at each other as competition. If you look at the kind of society that we’re in right now, we had a big tax law change a few years ago. The mutual companies got together and the executives, they flew out to Washington, DC many times and met with policymakers, lawmakers and educated them on the nature of insurance and the taxation associated with things lobbying essentially for the best interest of policy owners. They all got together to do that. It wasn’t this effort of one or another. It was all of them together. A mutual company is some of the best companies out there. I believe that the mission that was created hundreds of years ago with these companies continues to be carried on from one executive team to another. They’re called banks, little banks that mutual insurance companies would give out to policy owners. If you look at them, but there are little slots in here. There are dates here. We opened one up and it had a mechanical way in which it changed dates. There’s a slot for coins, a slot for little dollar bills.
Ultimately what happened is people would save into these little banks and the insurance company would come around, pick them up and take the money and use that for premiums. Most people don’t know that the insurance policies, the Wealth Maximization Account, these cash value insurance policies are at the foundation of what we consider to be the most-sound strategy out there. They were ultimately the original financial planning, that original financial strategy before the 1980s took on more of securities-based financial plan. That’s what people started using to save their money. Previous to that, people would save inside of these types of life insurance policies. They had the loan provisions. They had the same type of taxation, the same type of growth. I would say perspective as far as the foundation of financial life. It’s been great for me to experience that. It helps my company look to the future and feel good about the decisions we’re making now. Insurance companies like these are going to be around for a long time. Join us next time as we talk about how one of the most aided financial topics out there is now less of a concern for you. We’ll go over the many ways The Perpetual Wealth Strategy and your cash value life insurance helps you pay less to Uncle Sam.
About Patrick Donohoe
Patrick is the President and CEO and started Paradigm Life in 2007 after learning from his mentor Kim Butler about financial strategies outside of Wall Street. With a background in economics and marketing, Patrick immediately realized the opportunity to teach investors, business owners, professionals and families on a large scale using modern digital media and communication technology. Since 2007 Paradigm Life has worked with thousands of individuals in all 50 states. Patrick has shared the stage with financial experts such as Robert Kiyosaki, Peter Schiff, G Edward Griffin, Tom Hopkins, Blair Singer, and more. Patrick co-created the Cash Flow Wealth Summit (www.cashflowwealthsummit.com) with his friends Tom Wheelwright, CPA of Provision Wealth and Andy Tanner, the author of 401kaos and Stock market cash flow (have links to their websites and books). Patrick hosts The Wealth Standard Radio – a popular financial podcast every Wednesday morning at 9am MST on the Tune In Radio Network. The Wealth Standard Radio has been on the air since 2007. Patrick grew up in West Hartford, Connecticut and moved to Salt Lake City in 2003 to attend the University of Utah and graduated with a BA in Economics. His yearly highlights are a family trip to his parents home in Cape Cod, Massachusetts and to Hermosillo, Sonora Mexico where his wife Synthia’s family resides. He enjoys playing ice hockey and is an avid participant in CrossFit. Patrick currently resides in Salt Lake City, Utah, with his wife Synthia and their three children Hannah, Meghan and Jack.
A Wealth Maximization Account is the backbone of The Perpetual Wealth Strategy™