maxherr
Expert
- 67
All the profit from a mutual insurance company is returned to the whole life policy owners, in the form of a tax-free dividend. When reinvested into your policy every year, it does incredible things for the growth. 100% tax-free growth, on top of that (as long as it never becomes a MEC). It's the only tax-free dividend in the world.
Boy, oh boy! Someone just completed his prelicensing course! Except you don't know the difference between "tax-free" and "tax-deferred". And you don't understand the technical aspect of "divisible surplus".
Stock companies return dividends to shareholders (not policy owners) that are taxable at the capital gains rate. (I believe capital gains will be abolished in the future)
And you certainly have little or no grasp of taxation in the United States. Stock dividends are considered "ordinary income" and are not taxed at the lower capital gains rates.
But worst of all, you don't understand the meaning of "ownership" when it comes to who it is that owns a mutual insurance company. Policyowners, according to a most recent federal court opinion, are not paying for anything other than their life insurance contractual promises when they pay premiums to a mutual insurance company. They are NOT paying a dime for any measure of corporate ownership. And as the court pointed out in its analysis of mutual life insurance companies, policyowners pay "slightly more" for the privilege of receiving refunds of their excess premiums.
I've said the same thing time and time again on another forum, only to be scoffed at by others. But it's the truth, and the court recognized it based on the expert testimony presented during the trial and on appeal. As the court identified, regardless of the size of a policy or the premiums being paid, a participating policyowner has only one vote when it comes time to elect members of the mutual insurer's corporate board of directors. This is vastly different than stock-based corporations of any kind, where a person receives one vote for every share of common stock he/she owns.
(The issue before the court was actually a tax matter concerning the shares an individual received when his five mutual insurance companies demutualized many years ago. While he initially claimed no cost basis in the shares he received, he later decided that he paid too much tax on the sale of those shares and resubmitted his amended tax returns showing a cost basis, and requesting a refund of excess tax paid. The IRS denied his cost basis calculation and refused to refund any taxes, which led the case to the federal courts, where the court agreed that the shares were funded with the proceeds of each company's IPO, and were not related in any way to the cash reserves of the policies or the cash reserves of the insurance company. With no ownership interest in the company, according to the court, the demutualization shares were essentially a tax-free gift with no cost basis, and when later sold at a profit, generated fully taxable capital gains.)
There are plenty of good reasons to consider doing business with a mutual insurance company. The ones touted by our newbie are not the most important.
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