IQ expert Tony Steuer: Do your financial homework before choosing a life insurance company
Q: How do I know where I should buy life insurance? Which insurance company should I pick? There are a lot of life insurance companies out there and many of them advertise on TV, so I’m not sure which life insurance company to trust.
A: This is a great question that’s applicable for new insurance as well for an existing policy. The answer will depend on a number of factors. If you’re in good health, you are in the driver’s seat.
As life insurance is a long-term financial contract, financial stability is an important consideration. If you’re buying something that won’t pay out for 10, 20, 30 or more years, you want to make sure there’s a good chance that those companies still will be around to pay the claim.
To assist you in this, there are companies that assess each insurer’s financial strength and its ability to meet future obligations. Four main companies offer these ratings. The criteria used differ from one rating service to another, so an “A” rating service from one company would not be equivalent to an “A” rating from another rating service.
Because of the difference in criteria, it’s important to obtain several ratings, as not all ratings are created equally. The insurance companies pay for their rating services and sometimes decide not be rated by all of the services. In some cases, insurance companies can choose to not have a rating published if they don’t agree with it.
The four major rating services are:
• A.M. Best: www.ambest.com.
• Fitch Ratings: www.fitchratings.com.
• Moody’s Investor Services: www.moodys.com.
• Standard & Poor’s: www.standardandpoors.com.
Another resource is the National Association of Insurance Commissioners (www.naic.org). More than 5,000 insurance companies file their annual financial statements with the association.
The annual financial statements are used to compile financial ratios known as “IRIS ratios.” These financial ratios serve as an early warning system for spotting troubled companies; ratios measuring such things as profitability, solvency and liquidity are analyzed. Poorly performing companies are recommended for immediate regulatory action, while others are recommended for less urgent (“targeted”) regulatory action.
A booklet with more information about IRIS is available on the insurance commissioners’ website.
Another formula calculated by the National Association of Insurance Commissioners is “risk based capital” (RBC), referring to the minimum amount of capital that a company must have on hand to avoid regulatory action. Limited information about RBC can be found on the association’s website.
The National Association of Insurance Commissioners website also features a section (https://eapps.naic.org/cis) on consumer complaints filed about insurance companies.
Tony Steuer is a licensed individual life and disability insurance analyst; about 30 such analysts are licensed by the State of California. He has more than 20 years of experience in the life insurance industry. Steuer is a member of the Curriculum Board for the California Department of Insurance. He is the author of “Questions and Answers on Life Insurance,” a reference book covering an array of life insurance topics for consumers and advisers.
For more information, visit www.lifeinsurancetoolbook.com.
If you have a life insurance question for Tony Steuer, please send it to firstname.lastname@example.org.