How to Choose the Right Life Insurance Company

Until the 1980s and 1990s, most consumers rarely seriously questioned the financial strength of most life insurance companies. Financial strength was usually only a cursory consideration when selecting life, annuity, and health insurance policies. However, the collapses of the junk bond and real estate markets in the 1980’s had an unprecedented impact on the financial stability of many insurance companies. Thirty-four life and health insurers with total assets of $1 billion went bust over an eighteen-month period in 1990-91, compared with a mere five with total assets of $41 million in 1981. Others started facing serious financial or solvency problems. Since 1988, ratings1 reports that 258 life and health insurance companies have failed.

The number of failures may seem enormous and disturbing, but it is not quite as large or as serious as it might first seem. First, most of these failures have been among small and inadequately capitalized companies that were (correctly) rated very poorly by the rating agencies. Second, the definition of “failed company” deems any company a failure “if at any time it was either (sic): (1) under supervision of an insurance regulatory authority; (2) in the process of rehabilitation; (3) in the process of liquidation; or (4) voluntarily dissolved after disciplinary or other regulatory action by an insurance regulatory authority.”

Finally, the intercession of the various state regulatory agencies together with the industry-sponsored procedures for guaranteeing solvency and bailouts, when necessary, have continued to prevent any of these failures from leading to any instances where any policy owner or beneficiary failed to receive death benefits.

Selecting the best insurance company involves more than evaluating its financial stability and operations, although that should be the paramount consideration. Additional factors include product availability and reputation for service and fairness to policyholders.

Because policy illustrations are only as good as the underlying mortality, expense, and investment assumptions, the first and most important step in selecting a life insurance policy is to assess the financial strength of the insurance company. Once one selects a group of strong companies, then one can compare the pricing, illustrations, contracts, and service of the strongest companies.

The principal point is not that A M. Best’s rating was incorrect or that A M. Best should have detected the problem sooner, but rather than relying on ratings alone may be inadequate.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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