Sunday, April 25^th 1999

Q   My life insurance company is planning to convert from a mutual company to a stock company. What does this mean and how should I respond?

A   Life insurance companies traditionally started out as mutual life insurance companies. They were made up not of shareholders but "members," who are the policyholders who buy life insurance or annuity policies.   Members are entitled to certain rights, such as voting for management, the expectation that the company will be run for the members' benefit, and a share of the profits in the form of dividends. When an insurance company "demutualizes," it converts to a stock company in which anyone, policyholders and non-policyholders, can own the stock.

Mutual life insurance companies say they are better able to raise capital as a public stock company, are more flexible, are financially stronger, and are in a better position to compete against other stock life insurance companies and large financial services firms. However, critics contend that the drive is primarily by management wanting higher pay and stock options.

Full demutualization occurs when the company converts entirely to a stock company. The policyholders typically trade their membership for shares of stocks, cash or policy enhancements, though their insurance contracts remain in force.

In a partial demutualization, the company forms a holding company. The mutual life company is converted to a stock company which is owned and run by the holding company, which typically owns at least 51 percent of the shares. The policyholders thus become owners of the holding company while remaining as contract holders in the stock company.

If your insurance carrier is a mutual life insurance company and is planning to reorganize, find out how it plans to reorganize. Be aware of the risks and rewards of conversion. As a policyholder, you have the right to vote for or against conversion. While full demutualization can often be good for policyholders, the company management may in fact not be up to the task of competing as a stock company. Also assess how financially strong the company is by checking A.M. Best and other insurance company ratings.

As this is a complicated issue, you'll want to talk to a knowledgeable financial adviser such as a Certified Financial Planner practitioner who is familiar with the issues.

Terry W. Nelson, CFP^TM MS      Hometown Financial Planning, Roseville    (651) 638-9428