A mutual life insurance company is owned by its:
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
A mutual insurer is owned by its policyholders, who may receive dividends representing distributions of the company's surplus. A stock insurer is owned by its shareholders, who elect the board of directors and are entitled to the company's profits. Fraternal benefit societies are owned by their members. Because the policyholders of a mutual company are the owners, policy dividends from a mutual insurer are a return of surplus to the owners rather than a distribution of corporate profit to outside shareholders. Ownership structure affects how the company is governed and how earnings are distributed.
Why the other options are wrong
- C) Stockholders own stock insurance companies. A mutual insurer has no stockholders because the owners are the policyholders. This option reflects a different rule and does not match the law that governs the transaction.
- D) Directors manage the company on behalf of the owners. They are not the owners of a mutual insurer. Accordingly, this plausible-sounding answer is one that examiners expect candidates to eliminate.
- A) Agents are producers who distribute the company's products. They are not the owners of the mutual insurer. This statement does not survive the statutory analysis presented above and is therefore wrong.
Memory hook
Mutual = owned by policyholders. Stock = owned by stockholders. Policy and ownership meet in a mutual.