Site loading image

BLOG 10/29/2019

How are life insurance companies rated?


Choosing life insurance is one of the most important decisions you’ll ever make. After all, you’re buying financial protection for the people you love when you’re no longer there to care for them. A lot of people choose a life insurance plan based on factors like coverage length and costs, but it’s not just about what you buy – it’s also about who you buy from.

While catchy ads and competitive rates are great, they’re not always a great indicator of the quality of a life insurance company. You want to be sure that the company you’re trusting to protect your family’s future is financially strong and will be around to pay your claim when you’re gone.

That’s where independent ratings agencies can be a huge help. These agencies provide you with a third-party, impartial assessment of the financial strength and stability of a life insurance company you may be considering for coverage. Here’s how life insurance ratings work and how to use them to pick your ideal plan.

What is the rating system for insurance companies?

When you’re shopping for life insurance, it’s important to get an independent, unbiased opinion of potential providers. Ratings agencies are designed to do just that by issuing financial strength ratings (FSRs) for life insurance companies. The higher the rating, the more likely it is that an insurance company will be able to pay out future claims. Companies with lower ratings may not be as financially stable, which could affect their ability to pay creditors and policyholder claims.

Instead of recommending one insurance company over another, ratings agencies provide you with an objective assessment of a carrier’s financial strength based on a variety of factors. These can include company size and age, financial statements, level of innovation, market risk, financial holdings, the amount they collect in premiums, and – perhaps most revealing – the amount they’re paying in claims. Ratings agencies consider all of these factors and then issue a grade based on a scale of A, B, C, and so on, making it easy to understand.

As for the ratings process itself, it usually involves an annual in-depth examination of an insurance carrier’s financials, including the company’s balance sheet, overall operating performance, and how it compares against industry standards. Each agency uses its own proprietary method to determine how well a carrier can meet obligations to its policyholders. Although the assessment process may vary from ratings agency to ratings agency, a carrier that’s highly rated by one agency isn’t likely to get a poor score from another.

Common ratings agencies and systems

As you compare life insurance companies’ rankings, one of the ratings you’re likely to see most often is from AM Best. In business since 1899, it’s the oldest and most established of the major ratings agencies – and the only agency to focus solely on ratings for insurance companies. The other main players are Standard & Poor’s, Moody’s, and Fitch.

When reviewing ratings, keep in mind:

  • Scores vary by agency. For AM Best, A++ is the highest possible rating, while the top ratings from Fitch, Moody’s, and Standard & Poor’s is AAA. On the other end of the scale, AM Best’s lowest rating is F, while Fitch and Standard & Poor’s use a D, and Moody’s bottom is a C.
  • Each agency uses its own system. As you compare life insurance companies, it’s a good idea to familiarize yourself with the rating criteria for each of the agencies. Anyone can access AM Best’s financial strength rating by searching the company’s website. You can also access the ratings for Standard & Poor’s, Moody’s, and Fitch once you create a free account.

Besides agencies that provide financial strength ratings, there are also companies that provide ratings for insurance carriers based on consumer feedback related to service or general experience with a company. Companies like J.D. Power, the Better Business Bureau, and Trustpilot offer ratings based on customers’ experiences and reviews.

While these ratings may tell you something about the customer experience a life insurance company provides, they don’t tell you how financially sound a company is. Furthermore, some reviews may be from consumers who had particularly positive or negative experiences that may be the exception, not the rule. The bottom line is that looking at multiple sources of ratings and reviews can help you narrow down your choices for term life insurance or permanent life insurance, helping you feel confident you’re selecting the right life insurance company.

Playing it smart

While most major carriers are reliable and trustworthy choices for coverage, taking the extra step to research their ratings will give you added peace of mind in knowing they’ll be there when you need them to pay your claim down the road.

When you’re shopping for coverage, use the ratings system as a valuable guidepost. If you’re deciding between an A++ insurance company and an A+ one, you can feel confident with either one. But if you’re choosing between an A+ company and a B- company, you may want to go with the former. An insurer doesn’t need to have the highest possible rating to be a safe choice, but it’s a good idea to avoid those closer to the bottom of the scale.

With access to term life, permanent life, and final expense insurance from more than 20 A-rated companies, eFinancial connects you with companies you can trust. As you weigh your options, you’ll have the peace of mind knowing that your insurer will be there when you need it. Get started by easily comparing online quotes here.

 

At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.