How do I interpret life insurance company ratings from ratings agencies?

UPDATED: Jun 11, 2012

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Asked June 11, 2012

1 Answer

You have heard again and again how important it is to check the financial rating of a life insurance company before purchasing a policy, but what do those ratings mean to the average consumer? Each ratings company has a different grading scale, and they all gather the data needed to make those grades in different ways. Interpreting the results, from the consumer point of view, is much easier than you might think.

Most companies have a top rating of AAA, A++, or similar. In a typical grading scale, there are 3 "A" ratings, 3 "B" ratings, and 3 "C" ratings. Additionally, life insurance companies which are in severe distress, undergoing liquidation, or have been suspended from operation are indicated with special grades by some companies, such as the "S" grading from the A.M. Best Company. For purchasing life insurance, the best advice is to limit your considerations to companies which, at the very least, are rated in one of the top, or "A" categories.

The triple "A" rating indicates a life insurance company that has a strong financial foundation, is not currently undergoing a takeover or merger, and has a strong outlook for future stability. The "B" rated companies indicate insurers which may still be stable but have suffered a financial setback of some sort recently. While these insurers are still considered stable by financial ratings companies, consumer would be well advised to remember that research by A.M. Best has shown that the top tier insurers are more than 33% more likely to remain stable than their "B" category counterparts. Ratings below the "B" level may not be suitable for consumer usage, but could prove to be a profitable investment for shrewd and cautious investors.

Insurance company ratings should not be the only consideration you use to choose a life insurance company, but making sure that the company you do purchase from is financially stable could be vital to the effectiveness of the policy. Even though most states have a safety net to protect life insurance policies against financial collapse, the payout on such policies could be as much as 40% to 60% lower than on a policy purchased from a company with good financial strength.

Answered June 11, 2012 by Anonymous

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