You buy Life insurance for the financial protection it offers. The proceeds from a Life insurance policy can replace the income your family loses after you’re gone. When deciding on which policy to buy, it’s imperative that you choose an insurance company that will still be around after you’re gone.
The key to an insurance company’s longevity is its financial rating, which is represented by a letter grade. Insurers are graded by credit rating companies that have been designated as Nationally Recognized Statistical Rating Organizations (NRSRO) by the Securities and Exchange Commission (SEC). A credit rating company receives this designation if the SEC feels it has a reputation in the United States as an issuer of credible and reliable ratings by the majority of financial institutions that use its information.
After a credit rating company receives its NRSRO designation, it can then rate financial firms like insurance companies. There are specific criteria that an NRSRO uses when rating an insurer. These criteria include:
- Potential for growth
- Diversification of the types of businesses it is involved in
- Earnings
- Profitability
- Management of operating expenses
After all of these factors are considered, the NRSRO assigns the insurance company a letter rating. Keep in mind that each NRSRO’s rating system is a little different; however, all of them use some form of an “A” rating for indicating a top rated company. Generally speaking, you want to purchase a policy from an A-rated company.
There are five main NRSROs that rate insurers:
- A.M. Best (http://www3.ambest.com/consumers/)
- Fitch (http://www.fitchratings.com/)
- Moody’s (www.moodys.com – requires free registration to access ratings)
- Standard & Poor’s (http://www2.standardandpoors.com/)
- Weiss Research (http://www.weissratings.com/HL_Life.asp)
After you have researched an insurer’s ratings, you should:
- Call their customer service line and ask for the company’s ratings from each of the ratings services. If the service representative refuses to tell you or lies about the ratings, don’t buy any products from that company.
- Ask the insurance company for copies of its ratings reports. If it complies with your request, it is a sign that the company is consumer-friendly.
- Ask your agent to explain each rating service report to you in simple terms. If the agent can’t explain the various ratios and terms, it is a sign that they have not been properly trained. That same lack of training may also manifest itself when you need your agent to handle a claim, evaluate future insurance needs, or recommend additional products.
