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What is demutualization
Why do
companies demutualize
Who is entitled to receive compensation
How come I didn't
know
How is the amount of compensation determined
Am I entitled to receive unclaimed compensation as
heir to a deceased policyholder
Are holders of small face value policies entitled to
receive compensation
How does demutualization affect my rights as a
policyholder
Are there any long-term benefits of demutualization
How do I make a
claim
What happens to unclaimed demutualization proceeds
Is there
a time limit on claims
Is
demutualization compensation taxed?
What if I have reason to believe deceased family was
an policyholder entitled to unclaimed demutualization compensation
What is demutualization?
Demutualization is the process of
converting a mutual life insurance company, which is owned by its
policyholders, into a publicly traded stock company owned by shareholders,
who may or may also be policyholders. A company demutualizes
pursuant to a plan of conversion which must be approved by both policyholders and government
regulators. In exchange for their ownership interest in the old mutual
insurance company, policyholders are entitled to receive a combination of
stock, cash, and/or policy credits in the new company.
Why do companies demutualize?
Mutual insurance companies elect to demutualize
because as publicly-traded stockholder-owned companies it is easier to
raise capital, effect mergers and acquisitions, and to attract and retain
employees through the use of stock options.
Who is entitled to
receive compensation?
Each companies plan of conversion defines which policyholders are entitled
to receive compensation, and there are differences among them. Eligible
policyholders generally include those whose policies are paid-up and in
force on or before the date of demutualization, and their heirs.
How come I didn't know?
Each plan of conversion from a mutual insurance company to a stockholder
owned company specifically addresses what steps must be taken to notify
policyholders both of their right to vote on the conversion, and of their
potential entitlement to receive compensation for their ownership
interest. If you had an unreported change of name (after marriage or
divorce) or address, you may not have received the required
correspondence. In fact, on average only about 1/3 of those eligible vote. Your entitlement may also have been missed if you are the
rightful heir to a policyholder who failed to claim the compensation.
Am I entitled to receive unclaimed compensation as rightful heir to a
deceased policyholder?
Yes, heirs are entitled
to receive unclaimed demutualization compensation.
How is the amount
of compensation determined?
The amount each policyholder is
to receive is generally based on a number of factors, including length of time the policy has been in force, face value of the policy, and total premiums paid. For many policyholders,
the windfall arising from demutualization can be substantial, and the
financial benefits continue to accrue long after a company demutualizes,
in the form of an appreciated stock price dividends and stock splits.
Are the
amounts substantial - what sort of dollar figures are involved?
The amounts involved vary
according to each company's plan of conversion, and where compensation is
in the form of stock, how well the demutualized company has performed.
MetLife, for example, estimated its unclaimed demutualization compensation
at 60 million shares, worth $2,040,000,000 at the current share price.
Prudential was unable to
locate 1.2 million policyholders and heirs entitled to receive their share
of 110 million shares of stock worth over $3.025 billion. More than
400,000 John Hancock
policyholders and heirs failed to claim their entitlement of 229 million
shares.
Are holders of small face value policies entitled to receive compensation?
The answer is often "yes". Millions of small face
value policyholders - including owners and heirs with so-called industrial
life and burial insurance - are entitled to collect. Due to poor record
keeping, these policyholders constitute a disproportionate share of those
who have not yet claimed compensation.
How does
demutualization affect my rights as a policyholder?
Demutualization does not affect policy benefits for policies that remain
in force. It may, in fact, reduce your policy premiums if some or all of
the compensation you are entitled to is in the form of policy credits.
Are there any
long-term benefits of demutualization?
As a shareholder in the demutualized
company, you may now be entitled to share in the company's profits via stock
dividends, and benefit from its growth in the form of an appreciated share
price. Your shares may be sold at any time, without affecting policy
benefits.
How do I make a claim?
The claims process is simple
and straightforward. If you are claiming funds for a deceased family
member, you will need to provide proof of death and verification of your
entitlement.
What happens
to unclaimed demutualization proceeds?
If the demutualized company is unable to locate policyholders or heirs
owed compensation within a reasonable period of time set by statute, the
unclaimed stock and/or cash is remitted to the protective custody of a
government trust account. Thereafter owners or heirs can reclaim their
funds from the custodian.
Is there a time limit on claims?
No. The demutualization
proceeds, once remitted as unclaimed property to a government custodian,
are generally available for claim in perpetuity. Prompt action should be
taken, however, as there is a downside to waiting. Unclaimed stock in the
demutualized company may be sold by the custodian after a period of time.
Thereafter you are entitled only to the proceeds of the sale, not any
dividends or price appreciation which occurred after the sale date. This
can be a significant loss, as share prices often rise 50% or more in the
first year. In
addition, you may be subject to capital gains tax on the forced sale, with
a tax basis of zero (see below).
Is demutualization
compensation taxed?
Current IRS policy, based on Revenue Ruling 71-233, treats these
distributions as capital gain income with a zero basis. A lawsuit has been
filed against the Internal Revenue Service in Federal Claims Court in
Washington, D.C., seeking a refund for taxes paid on stock and cash
distributions received when mutual insurers converted to stock ownership.
The suit, which seeks class action status, attempts to classify the
compensation to policyholders as a return of premiums paid, with a tax
basis equal to the fair market value at the date of distribution or the
amount of the policyholder investment in the insurance contract, whichever
is less.
What if I have reason to believe deceased family was an policyholder
entitled to unclaimed demutualization compensation?
If you have reason to believe
a deceased family member was entitled to unclaimed demutualization
compensation, eventually the proceeds will be remitted to a government custodian.
The statutory length of time that must elapse before the proceeds are
turned over is known as the dormancy period. Dormancy periods on unclaimed
demutualization compensation vary by state, but generally run one-to-three
years.
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