Life Insurance Ratings

Life insurance may be the only product that exists where those who purchase it hope that they are throwing their money away on something that they will never use. For those unlucky few who are able to use their life insurance, it is important that it will pay off. The insurance rating system enables people to identify which insurers are more likely to be around to pay claims than others.

To understand the importance of life insurance ratings, one first should understand how insurance works. Insurance is a means where individuals can pool risk with other people. For instance, the chance of one dying from a fireworks accident is approximately one in eight million in a given 10 year period. If one would need one million dollars to provide for one’s family, they could save that amount of money, just in case something happens on July 4th. This is called self-insurance. Another option would be t o find eight million other people, and have each person pay twelve and one half cents. That would add up to a million dollars, which could then be paid to the unlucky person whose bottle rocket blew up.

The challenge inherent in the insurance model is that although one can compute long-term averages, one cannot be sure what will happen in a given year. Taking the fireworks example above, it is conceivable that a fireworks show could go horribly awry and kill 20 people. If the insurance company is not financially strong with adequate reserves, they will not be able to pay all of the claims. A real world example of this is the emergence of HIV/AIDS thirty years ago. Before it was treatable, it caused a spike in the death rate of previously healthy young and middle aged men, which is a population that typically has an extremely low death rate.

The leading rating agency for life insurers is a concern called A.M. Best and Company. Their Financial Strength Rating (FSR) scale contains a number of different letter grades ranging from A++ to F. Note, though, that any life insurance rating of B or lower indicates not that the company is “above average” but that it is vulnerable. With this in mind, one should consider life insurance companies with superior ratings of A++ or A+. A and A- rated companies are considered excellent, as well. This rating is based on a number of different factors.

Most reputable insurance quoting sites or agencies will limit the companies that they represent to those rated A- or above. In addition to this, one can look up individual company ratings at A.M. Best and Company’s website (www.ambest.com). Because one needs their insurance to pay out in times of extreme need, finding a highly rated company is crucial. Luckily, the rating of a company has little effect on its pricing, making coverage from a strong carrier frequently more affordable than coverage from a weak carrier.