The demutualization of several major insurance companies has created headaches for many elders, their families, and most of all the executors of their estates. Most older life insurance companies were “Mutual Insurance” companies. That means that there were no stockholders of the company, as it was owned by everyone who owned a policy. The policy holders shared in the profits of the company in the form of dividends.
But, this form of business hampered the ability of the insurance companies to grow and to obtain capital for growth and acquisitions. With changes in the laws that allowed insurance companies to offer other services (and banks to offer insurance), many companies realized that they needed more capital to compete and a surge of demutualization began. Prudential, MetLife, John Hancock, Sun Life, and many others demutualized. Other companies, such as Northwestern Mutual, Massachusetts Mutual, New York Life, and Pacific Life, decided to remain as Mutual Insurance Companies.
There are various studies on the benefits of demutualization. Some show it has been good business for the companies that did it. Others show detriment to policy holders as they no longer receive dividends and have lost control over the company. Those companies that did not demutualize still pay dividends to policy holders, but may be losing out on some business options and profit as the mutual insurance company model does not allow them to engage in certain business nor to realize the full value of many of their assets.
Whatever the real result to the businesses and the policy holders, a main problem is that the companies that demutualized gave shares of stock to all of their policy holders. This has been a real pain to deal with for many people. Most of the people who got shares of stock didn’t know what to do with them and just held on to them. In many cases they have as little as 10 or 20 shares and at most a couple of hundred shares. These vary in value from a few hundred dollars to several thousand.
The problem comes in when these shares need to be cashed in. Most are held in an account managed by one of the big New York banks such as Bank of New York – Mellon. The paperwork required (including Medallion Signature Guarantees) is daunting and complex. Often the forms will be filled out incorrectly and the bank will return them (after several weeks) with a request to correct them, thus delaying the liquidation of the shares. Furthermore, there seems to be no way to just liquidate shares for a share-holder who has died. Ownership must first be transferred from the name of the decedent into the name of the estate, then the shares need to be sold by the executor of the estate. This requires all of the paperwork (and the signature guarantee) to be completed and sent to New York twice.
I sometimes think (although without any proof) that the stock holding companies make it difficult on purpose, although I’m not sure how they may profit off of any delays that they cause. I once completed all of the forms for an Estate where I was executor and the bank returned them to me saying the “Request for Taxpayer ID Number” [form W-9] that I used was obsolete and please complete another on the form they sent me. It was the exact same form with the same release date as the one I had used. This was a delay for no good reason.
In any case, the system is too complex and difficult for the amounts of money in consideration. Those policyholders who received shares of stock and didn’t know what to do with them are burdened with this new issue of dealing with the stock, or leaving it up to their heirs to deal with it. This was no favor to those involved and should be addressed by those companies that demutualized.
And, this doesn’t even take into consideration the tax consequences for each individual. The IRS originally held that the cost basis for these shares is zero, so the sale of the shares (by the original policy holder) created a fully taxable gain. Later, the tax court ruled that this is not proper and a basis can be assigned to the stock, but figuring that out is almost as tough as dealing with the New York stock-holding banks. Maybe Tax Girl www.taxgirl.com has an answer to the basis question, I don’t.