Evaluating Life Insurance Companies

When one commits to a life insurance policy, a person naturally assumes that the policy they were sold will be honored. Unfortunately, this is not always the case. Many universal life policyholders have found that their insurance company has changed the policy assumptions as a result of financial losses. The ultimate policy change is the dissolution of the insurance company.

This article will explain the actions one can take to minimize the chances of a nasty surprise years after the policy was purchased.

Here are a few areas to examine when selecting a life insurance company:

• • The types of policies sold by the company.

• • The company’s reputation for fair treatment of policyholders.

• • The company’s financial stability.

• • The experience and history of the company.

• • The company’s licensing and certification.

• • The company’s incorporation form.

Types of policies

Not every company sells every variation of the life insurance policy. The process of buying any financial services product involves three major decisions:

• What is the appropriate product for a person’s needs and capabilities? A person lacking in extensive investment experience and knowledge should not be purchasing a variable product. For every product, there is a target market. If one does not fit the target market, chances are the product is not appropriate for the specific individual.
• Once one knows which product(s) is/are appropriate, identify who offers them. Identify the variations and options offered by various companies
• Evaluate the insurance company.
• Company Treatment of Policy Holders

There are numerous consumer, industry, and government organizations that log customer complaints. These include the Better Business Bureau, state insurance commissions, and the Federal Trade Commission.

Financial Stability

Industry accounting is a world unto itself. Unless you review insurance company financial statements for a living, there is only one way to identify an insurance company’s financial stability. One must use the ratings issued by one of the major life insurance rating firms. The major firms include the following:

• Standard & Poor’s
• Fitch Ratings
• A.M. Best
• Moody’s Investors Services

There are also two other firms that are less well known; TheStreet.com Ratings (formerly Weiss Ratings) and Kroll Bond Rating Service.

Each firm has a proprietary system for evaluating financial strength. The scale they use is also proprietary. An A+ rating for one company may yield a ‘good’ rating while it is a ‘top category’ rating for another. The scales are not consistent across companies.

Prospective buyers are advised to consider ratings from multiple companies. Buyers should also recognize that rating services are not infallible. Some were epically wrong in their evaluation of financial products at the onset of the Great Recession in 2008-2009. They also misevaluated the likes of Enron and other large companies as they were failing.

Company History

The commonly used phrase in financial services is that ‘past performance is not a guarantee of future performance. Hundred year old companies can fail. Yet companies with a tradition of conservative accounting, investing, and a steady management style allow a policy holder to sleep better at night.

Certification

The Insurance Marketplace Standards Association (IMSA) is an industry group created in 1996. The organization was created in response to a growing negative perception of the industry due to the behavior of some bad actors. Membership is voluntary. Companies must show they are in compliance with approved behavior and pledge to continue to comply.

As an industry group, potential buyers should recognize the ‘friendly’ relationship between the organization and its members. IMSA has no enforcement authority nor does it have much leverage on all but the worst actors. From a potential buyer viewpoint, IMSA membership should be viewed as a modest positive. Expulsion from IMSA should be seen as an enormous red flag.

Incorporation

There are two different incorporation forms of life insurance companies: stock companies and mutual companies. Stock companies are owned by shareholders. Policyholders own mutual companies. Mutual companies typically pay an annual dividend to whole life policyholders. Potential buyers should understand that not every product sold by a mutual company is eligible to receive a dividend. Potential buyers should inquire about dividend policies for products offered by mutual companies.