When purchasing a life insurance policy, many people carefully consider factors such as coverage type, premiums, and death benefit amount. However, there’s another important aspect that’s commonly overlooked: the financial stability of the life insurance company itself.
Life insurance plays a critical role in providing financial security for your loved ones after you pass away. Life insurance is also commonly used for business succession, retirement planning, charitable giving, and more. With so much at stake, getting to know the insurance carrier you choose can be critical to ensure your policy pays out as you intend without hiccups.
Assessing a life insurance company’s financial strength gives you a clearer picture of its overall health and reliability. This extra step helps you choose a carrier with strong financial footing, so you can be confident that your policy’s benefits are secure. In the following guide, we’ll cover exactly how to conduct your due diligence, including how to find, review, and interpret financial strength ratings.
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Why a Carrier’s Financial Strength Matters
A financially stable life insurance company is likely to have the means to meet its obligations, ensuring that both death benefits and cash value payouts are handled effectively, even amid economic challenges or market fluctuations. Less stable carriers may be acquired by other companies down the line, which can make keeping track of your policy more challenging.
When you purchase a life insurance policy, you enter into a contract that may span several decades. Choosing a strong, highly-rated company can help ensure your policy remains viable until you or your loved ones are ready to take advantage of the benefits.
Reviewing and Interpreting Financial Strength Ratings
Credit rating agencies (CRAs) provide a systematic approach to evaluating the financial strength of insurance companies. They use information regarding an insurance carrier’s liquidity, profitability, investments, and liabilities to assess its ability to meet both current and future financial obligations. The stability and creditworthiness of a company are then reflected in a rating, which individuals, financial professionals, and others use to compare insurance carriers.
The four primary CRAs are:
- Standard & Poor’s (S&P)
- Fitch Ratings
- Moody’s Investor Services
- A.M. Best
Each of these agencies applies its own rating scale and set of criteria. Understanding how they relate can help you better assess an insurance company’s financial health.
A.M. Best | Fitch | Moodys | Standard & Poor’s |
|---|---|---|---|
A++ (Superior) | AAA (Highest quality) | Aaa (Highest quality, minimal risk) | AAA (Extremely strong) |
A+ (Superior) | AA (Very high quality) | Aa (High quality, very low credit risk) | AA (Very strong) |
A (Excellent) | A (High quality) | A (Upper-medium grade quality, low credit risk) | A (Strong) |
A- (Excellent) | BBB (Good quality) | Baa (Medium-grade quality, moderate credit risk) | BBB (Adequeate) |
B++ (Good) | BB (Speculative) | Ba (Medium-grade quality, substantial credit risk) | BB (Facing financial instability) |
B+ (Good) | B (Highly speculative) | B (Medium-grade quality, high credit risk) | B (Vulnerable) |
B (Fair) | CCC (Substantial credit risk) | Caa (Poor quality, high credit risk) | CCC (Vulnerable and may be succepitble to changes in business conditions) |
B- (Fair) | CC (Very high credit risk) | Ca (Poor quality, and likely to or nearing default) | CC (Highly vulnerable) |
C++ (Marginal) | C (Near default) | C (Lowest quality, with little prospect for recovery) | C (HIghly vulnerable, low expectation of recovery) |
C+ (Marginal) | RD (Restricted default) | D (General default or breach) | |
C (Weak) | D (Default) | NR (Not rated) | |
C- (Weak) | |||
D (Poor) |
Investment Grade vs. Non-Investment Grade Ratings
Since each rating system is different, reviewing ratings from various agencies can feel a bit like interpreting alphabet soup. However, there are two primary categories of ratings: investment grade and non-investment grade.
Insurance companies are considered investment grade if they are rated:
- BBB or higher by Standard & Poor’s
- Baa or higher by Moody’s
- BBB or higher by Fitch
- B+ or higher by A.M. Best
This indicates that the company is considered to have a lower risk of defaulting on its obligations.
Non-investment grade ratings, often referred to as “junk” ratings, signal a higher risk of the insurer defaulting on its obligations. Companies that fall within this category are likely to face financial challenges or uncertainties that could affect their ability to meet policyholder claims.
Since non-investment grade ratings are considered a higher risk, use caution, seek additional information, or explore other options when considering a life insurance policy from a carrier in this category.
How to Find Financial Strength Ratings
There are several key ways to find the rating information for an insurance carrier:
- Visit CRA websites: Each of the major credit rating agencies has a website where you can search for the financial strength ratings of specific life insurance companies. However, they may charge for the information you need.
- Check insurance company websites: Many life insurance companies publish their current ratings from various CRAs on their websites. Rather than rely on this information alone, consider verifying with at least one other source.
- Conduct an online search: A simple online search using the company name followed by “financial strength rating” can provide quick access to its ratings.
- Consult a financial professional: Financial advisors, especially those specializing in insurance, typically have access to the latest ratings and can offer professional advice on the financial health of insurance companies.
Since CRAs use different methods to evaluate insurance carriers and frequently do not agree on ratings, it’s helpful to review a company’s ratings from two or more agencies before deciding to buy or keep a policy.
Credit agencies also periodically update their ratings to reflect changes in the insurer’s financial condition or market dynamics. Consider reviewing your insurance carrier’s ratings once a year to ensure you have current information about the company’s financial strength.
All In All
While finding and interpreting financial strength ratings requires a bit of effort, it can be a critical step in choosing a life insurance provider. A company’s rating is not a guarantee of future performance, but it’s a valuable indicator of its current financial health and ability to meet current and future obligations to policyholders. By taking the time to research these ratings, you can help ensure your life insurance policy is as secure as possible.