You have had a life insurance policy for decades. It may even have been one of the infant policies taken out by your parents in the 1920s, 1930s or 1940s. Although I wasn’t around at the time, many of my clients were. I have often heard stories about the life insurance agents during those years. The agent would come to your house every Friday evening because Dad was paid weekly. Mom or Dad would pay the agent the 10¢, 15¢ or 25¢ weekly life insurance premium on the policy.
When you became an adult, you were given the policy. You haven’t paid a premium for years because the policy is fully paid-up. That $500 or $1,000 policy may now be worth $5,000 or $10,000, or more. I have seen many of these policies. And you may have started receiving quarterly or annual dividends from the life insurance company in the late1990s or early 2000s, instead of the dividends being added to your policy.
The insurance company may have been a mutual insurance company, such as John Hancock, Manulife, MetLife, Prudential, Sun Life, UNUM or Western & Southern. Or it could have been a smaller insurance company that was bought out by one of these larger companies. But what is a mutual insurance company?
A mutual insurance company is a company in which the policyholders are the owners of the company. It’s kind of like a credit union where the depositor members are the owners of the company. The earnings of the company are divvied up among the policyholders who are paid dividends from these earnings as paid up additions to their life insurance policy. That is why your $500 or $1,000 policy can be worth much more than the face amount of the policy.
Many of these mutual insurance companies, including all of the ones I listed above, demutualized themselves. Demutualization is the process by which the policyholder owned mutual insurance company changes its legal form to a stock company. The mutual insurance company issues stock to its policyholders as evidence of their ownership in the company.
Typically the stock issued is then publicly traded on one of the major stock exchanges. Just like other public companies, when the company has earnings that it wants to distribute, a dividend is paid to its shareholders, usually quarterly.
Since 1930, more than 200 mutual life insurance companies have gone through the process of demutualization. Many more were merged into those companies prior to their demutualization. In the late 1990s and early 2000s, there was a surge of demutualization of life insurance companies, including all of the companies I listed above. By the beginning of 2007, it is reported that there were fewer than 80 mutual life insurers in the United States.
If you are receiving dividends from one of these formerly mutual insurance companies, you may think that it is a dividend on your life insurance policy. However, it may actually be a dividend on the life insurance company stock that you own. You may not even know that you own the stock because the company never issued a stock certificate to you. Many former mutual life insurance companies just hold the stock for you in a book entry account.
I have had many estate planning clients over the years who never realized that they owned stock in a demutualized life insurance company. As part of their estate planning process, when we went through their assets and income tax returns, we discovered that in addition to their life insurance policies, they owned stock in the life insurance company. Our clients were pleasantly surprised to find out that they had additional assets of which they were not aware.
Unfortunately, these life insurance company stock shares may not be discovered until after a death. When that is the case, there may be probate court involvement. If the value of all probate assets including the stock shares is under $21,000 in 2012, we can use abbreviated small estate procedures. However, if the stock value takes the total of the probate assets above $21,000, then there has to be full blown probate court procedures including creditor notice publishing, payment of inventory and filing fees and waiting the statutory time periods.
We just came across an estate this week that had almost 500 shares of stock in one of these demutualized life insurance companies which was worth almost $15,000. The family had already filed the life insurance claim. They never realized that there was also stock in the company now owned by the estate. Since the value was below $21,000, we could use a small estate procedure with substantially less legal fees than with the full blown probate court procedures.
If you have held any life insurance policies for a long time, you owe it to yourself and your loved ones to check it out. Was the life insurance company a mutual company that is now a stock company? If so, do you own any shares of stock in the company? You may be surprised with the answer.
If you have some of this stock, do something about it. If you have a brokerage account, you may want to just transfer the stock to the account with your other investments. Or you may just want to sell the stock and take the cash. If you have a trust, you may want to retitle the stock account into the name of your trust. Don’t just leave the stock in the book entry account in your sole name for your loved ones to deal with after you are gone. This may result in additional costs and expenses for your loved ones. Good luck and happy hunting for your stock.
By: Matthew M. Wallace, CPA, JD
Published edited October 21, 2012 in The Times Herald newspaper, Port Huron, Michigan as: You might be a stockholder and not know it