How to Use Life Insurance Financial Strength Ratings
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Knowing that you have insurance as a financial safety net provides important peace of mind. But that safety net weakens if the ability of your insurer to pay claims is in doubt.
This is especially true for life insurance companies. After all, people often count on their life insurance policies to be able to make payouts decades after they buy the policy. That’s why several companies are in the business of evaluating insurers’ financial strength.
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What are financial strength ratings?
Financial strength ratings estimate the likelihood that an insurer will be able to meet its financial obligations, such as paying claims. Each ratings agency evaluates insurers slightly differently, but ratings are generally based on factors such as a company’s financial holdings and how much it is collecting in premiums compared with how much it’s paying out in claims. All the best life insurance companies are financially strong.
A financial strength rating is not a recommendation to buy from a certain company, and it doesn’t measure customer satisfaction.
Financial strength ratings are different from issuer credit ratings, which predict future credit risk. Issuer credit ratings are sometimes listed next to financial strength ratings, so be aware of the difference when researching companies.
Who issues ratings
The main ratings agencies are:
A.M. Best: requires A.M. Best membership
Standard & Poor’s: requires free registration
Fitch: requires paid registration
Moody’s: requires free registration
A.M. Best traditionally focuses on insurance companies, while Fitch, Moody’s and Standard & Poor’s also rate other types of financial businesses and products.
Because they use different criteria and weigh those criteria differently, ratings agencies may produce different ratings for the same company. And not all agencies rate all insurance companies. Still, by comparing financial strength ratings, you can get a picture of your life insurance company’s financial health.
Insurance companies often post their financial strength ratings on their websites.
How to decode the ratings
Ratings agencies have different ratings and scales, so decoding results can be tricky. An A+ from one agency will not mean the same thing as an A+ from another, and not all agencies have an A+ rating to begin with.
Ratings agencies typically assign life insurance companies one of nine to 16 long-term financial strength ratings, the highest of which mean that the company is very likely to be able to pay out future claims. A.M. Best’s strongest financial ratings are A++ and A+, while the best from Fitch and Standard & Poor’s are AAA and AA. The top ratings at Moody’s are Aaa and Aa.
At the other end of the scale, the lowest ratings mean a company is in danger of not being able to pay future claims and might even be at risk of going under — a problem whether you have term life or whole life insurance.
When comparing insurers' ratings, keep the agency's financial strength rating scale nearby for quick reference; each agency has one on its website. The scale will list the agency's ratings and what they mean.
How should ratings guide insurance choices?
If you’re choosing between two companies, one rated A++ and one rated A+, either one is likely to be there when you need it. But if you’re choosing between companies that are rated A+ and B+, financial strength may become a bigger factor in your decision. Above all, avoid insurers that one or more agencies rate as vulnerable.