How to Use Life Insurance Financial Strength Ratings

Insurance, Life Insurance
Bank Vault Door

Financial protection and peace of mind are big benefits of having the right insurance. But you won’t have either if the ability of your insurer to pay claims is in doubt.

This is especially true for life insurance companies. After all, people typically count on their life insurance policies to provide coverage for decades. That’s why several companies are in the business of evaluating insurers’ financial strength.

What are financial strength ratings?

Financial strength ratings estimate the likelihood that an insurer will be able to pay its financial obligations, such as your claims. Each rating 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. Fortunately, all the best life insurance companies are financially strong.

Who issues financial strength ratings?

The main ratings agencies are A.M. Best, Fitch, Moody’s and Standard & Poor’s. A.M. Best’s ratings traditionally focus 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 weight those criteria differently, ratings agencies may produce differing ratings for the same company. And not all agencies rate all insurance companies. Still, by comparing ratings, you can get a picture of your life insurance company’s financial health.

Where do you find ratings?

It’s easy to find all of the four major ratings agencies’ financial strength ratings online. Anyone can access A.M. Best’s financial strength ratings and other insurance company information by searching the company’s website. You can also search Standard & Poor’s, Fitch and Moody’s ratings once you’ve created a free account.

How do you decode the ratings?

Not only do ratings agencies rate differently, but they also have different ratings 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 companies 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 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 unlikely to be able to pay future claims and might even be in danger of going under — a problem whether you have term life or whole life insurance. A.M. Best’s lowest rating is S, while Fitch and Standard & Poor’s use a D. The lowest score at Moody’s is a C.

A company doesn’t need to have the highest possible rating to be a good choice, but stay away from insurers at the bottom of the scale. For example, A.M. Best considers any company rated B and below to be financially vulnerable; Standard & Poor’s asks consumers to be cautious about companies rated BB and below.

How should ratings guide insurance choices?

If you’re choosing between two companies, one of which has an A++ rating and one of which is rated an 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. And certainly avoid insurers that one or more ratings agencies rate as vulnerable.

Compare multiple ratings for each insurer to best understand their financial situation.

NerdWallet’s life insurance estimator tool can help you find the best prices.

Alice Holbrook is a staff writer at NerdWallet, a personal finance website. Email: alice.holbrook@nerdwallet.com. Twitter: @alicenerdwallet.


Image via iStock.