Mark Bell: “My mother-in-law recently received a letter from her life insurance company notifying whole life customers that the company is considering a change from a mutual to a stock company. The members/policyholders will apparently vote their shares to decide for sure. Her question, ergo mine, is whether or not to convert the policy cash value to shares of stock in the new company or to leave it as cash. She does not need the cash and was satisfied to leave things alone to compound peacefully while she slept. What would be the prudent play with this one?”

Normally, these conversions (“demutualizations”) are done to enrich management, although I’ve never seen it expressed quite that way. I don’t know the details of your mother-in-law’s offer, but chances are she should go for the stock.

After all, the face amount of the policy remains guaranteed either way, and that $100,000 (or whatever) is the primary reason she bought the policy, or so I would assume. As time goes on, the cash value grows . . . but it is not paid out IN ADDITION to the life insurance face amount. The pay-out will still be $100,000. The growth in cash value just shrinks the insurance company’s risk. (That’s how whole life is able to keep the premium “level.” The premium starts high enough to build cash value when you’re young. It needn’t go up each year as the risk of death increases, because as the cash value grows, the insurance company’s exposure — to make up the difference — goes down.)

Taking the stock, she might do as well as management hopes to do (albeit on a smaller scale). So, without knowing the specifics of the offer, my guess is that going for the stock is the better choice. Then again, if she views the cash value as an emergency fund she wants to be able to count on no matter what — even if stocks in general or this stock in particular crash — it could make sense to sacrifice a likely gain for peace of mind.

 

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