When considering the purchase of a term life insurance policy, we recommend examining the financial ratings of the life insurance company to be sure the company you choose is financially sound. While the ratings can be quite detailed, you don’t need a degree in finance to make a reasonable decision. Learning these basics will help you understand the significance of the ratings used to assess the financial strength and stability of life insurance companies.
Credit Rating Agencies
A.M. Best and Standard and Poor’s (S&P) are independent financial and credit rating agencies that provide in-depth analysis of a life insurance company’s (or other entity) qualitative and quantitative financial strength. They offer opinions on the ability of the life insurance company to meet its financial obligations. Here are some examples of the information reviewed by credit rating agencies:
- Operating performance and plans
- Balance sheet strength
- Business profile
- Debt securities
- Business management and philosophy
- Comparison to competitors and industry standards
- Likelihood of default
- Assessment of historical data
- Anticipation of possible future impacts
A.M. Best ratings are based on a scale from ‘A++’ down to an ‘F’ rating. An ‘A++’ rated life insurance company is one that has a superior ability to meet its ongoing obligations to policyholders. An ‘F’ rated company is typically a company that has failed and is in liquidation.
S&P ratings range from ‘AAA’ at the high end to ‘D’ at the low end. S&P considers an ‘AAA’ rated life insurance company to have an extremely strong capacity to meet its financial commitments and obligations. Whereas a ‘D’ rating means the company is in default or bankruptcy.
Other well-known rating agencies are Moody’s Ratings, Fitch Ratings, and Weiss Ratings.
Credit rating agencies are an important source for determining the strength and stability of a company. However, they are not the only source. We don’t recommend you make important decisions about the purchase of a term life insurance policy solely by the company’s financial and credit ratings. On the other hand, it’s probably not a good idea to do business with a poorly-rated life insurance company.
When considering the ratings of these companies, keep in mind the difference between an ‘A++’ rated company and an ‘A+’ company is probably not going to matter much in the long run. It’s a little like splitting hairs at that point. If the ‘A++’ company is going to cost you significantly more in premium, you are better off choosing the ‘A+’ company and pocketing the savings.
If you are too busy to research life insurance company ratings (and who isn’t?), you can find the A.M. Best and S&P ratings of the companies we offer right alongside your quote. And to keep things simple, we only offer top-rated life insurance companies – ‘A’ rated or better!
How important do you consider life insurance company ratings to be? Will they impact your decision?