Despite an intense wave of consolidation in which the total number of American life insurers dropped from more than 2,000 in the late 1980s to just over 900 today, the process of shopping for life insurance remains daunting. Competing insurance providers offer thousands of similar products, which they often describe using insider terminology that seems designed to confuse people.
What’s more, many of these insurers are private concerns that have little interest in financial transparency. While most life insurance providers operate from positions of relative financial strength, the struggles of individual insurers have been well documented. As life insurance companies of all sizes have been known to fail, it’s important for prospective policyholders to do their homework before purchasing a specific policy.
Check out the Agency Rating
The most succinct measurement of a given life insurance company’s finances is its “agency rating.” There are currently four American financial-rating agencies that analyze insurers’ balance sheets: Moody’s, Fitch, Standard & Poor’s and A.M. Best. All of these are major firms with offices in multiple countries around the world, but only Best focuses exclusively on the insurance industry.
A.M. Best rates both the underlying financial strength of various insurers and the ongoing ability of these insurers to meet their current and future debt obligations. The company maintains a tiered rating system, assigning letter grades on a scale from “F” to “A++” and categorizing the companies that it reviews as either “secure” or “vulnerable.” It further qualifies its ratings by preparing company-specific outlooks that assess firms’ medium-term prospects relative to their industry peers. This outlook is described as “positive,” “negative” or “stable.” A.M. Best also telegraphs the likelihood of imminent changes to a company’s rating with a public declaration that it is “under review.”
The other major ratings agencies maintain some variation of this system as well. As the financial situation of many insurers is highly dependent on the vagaries of the financial markets, shoppers should pay careful attention to the direction and frequency of recent ratings changes. Multiple downward ratings adjustments may indicate financial malfeasance or a series of poor issuing decisions. Beyond agency ratings, shoppers can protect themselves in several ways.
Do Some Research on Your Own
First, many casual buyers simply compile a list of insurers in which they are interested and conduct a comprehensive Internet news search on each. This process often uncovers stories about unfavorable judgments over unjustly denied claims, excessive liabilities that may force premium increases, and past financial troubles. While news archives may contain plenty to support or contradict rating-agency analyses, they may also contain dated, biased or unverified information.
Look at Stock Market Prices
In addition to their agency ratings, public insurance companies are subject to the educated opinions of financial advisers and stock mavens. While the correlation is inexact, their stock prices often serve as useful proxies for their immediate financial health. Shoppers should treat sharply negative market movement as a major red flag.
Use a Third Party
As their financial health deteriorates, insurance companies may begin to defer payouts and add loopholes to newly-issued policies. Shoppers should use a third-party forum or a national accrediting organization like the Better Business Bureau to get a sense of a particular company’s payout practices.
Life insurance shoppers who conduct thorough due diligence may avoid many of the problems encountered by less-thorough customers. In the event that an underwriter does fail, each state operates a “guaranty fund” that guarantees continuing policies or reimburses policyholders who wish to cash out their old products. The payout caps on these funds vary by state but tend to be generous.