This is the final post in my mini series on life insurance. The previous posts in this series are:
When you buy life insurance, you want to make sure the company will still be there when your beneficiaries need the payout. Otherwise you just paid premiums for nothing. How can you be sure it will be there? Well, you can’t. Insurance companies can and do go out of business. Nobody can predict the future. But that doesn’t mean you shouldn’t try to pick a financially strong company when you buy your life insurance.
The good news is that you don’t have to learn how to read the insurance companies’ financial statements in order to evaluate the companies’ financial strength. Professionals already do that. When you compare rates on Term4Sale or any other sites, you will see the insurance companies’ ratings, for example A+ from A.M. Best. Like a scorecard, the rating is an indication of the company’s financial strength. Stronger companies are expected to last longer. Rating agencies are not 100% reliable, but in my opinion they do a far better job than amateurs like you and me. They are as good as you can get.
There are at least five companies who rate insurance companies in the United States — A.M. Best, Fitch, Moody’s, Standard & Poor’s, and TheStreet.com Ratings (formerly Weiss). Ratings from A.M. Best are the most often advertised, but A.M. Best also gives out the softest ratings. Just like in college, professors who hand out good grades for mediocre performance are more popular. Fewer students want to take a class from a professor who’s tough in grading. Companies like to get their ratings from A.M. Best because it makes everybody look good. Fewer companies apply for ratings from the other rating agencies. They go to the other agencies only when they want to show off they are good.
When you buy life insurance, an A+ (Superior) from A.M. Best is the minimum you should require. You should also look for a good rating from at least one other rating agency like Standard & Poor’s or Moody’s. In my opinion you should insist on a rating in the top 4 tiers from S&P or Moody’s, which means at least an AA- from S&P or Aa3 from Moody’s.
A.M. Best and Fitch offer free access to their ratings to everybody on the Internet. Moody’s and S&P also offer free access to their ratings online but they require a free registration. Get a user name and password from BugMeNot if you hate mandatory registration. TheStreet.com Ratings only publishes the names of the 10 strongest and the 10 weakest companies. It sells its ratings for $14.99 each. With ratings from the former four agencies available for free, I don’t see any point of paying for one from TheStreet.com Ratings. Here are the ratings search links:
- A.M. Best
- Moody’s (requires free registration)
- Standard & Poor’s (requires free registration)
- TheStreet.com Ratings (10 strongest and 10 weakest)
- Steven W. Pottier and David W. Sommer, Property-Liability Insurer Financial Strength Ratings: Differences Across Rating Agencies, The Journal of Risk and Insurance, 1999, Vol. 66, No. 4