Evaluating the Financial Strength
of Your Insurer
Financial strength is the most important factor a consumer should consider in selecting a company from which to buy life insurance.
In modern times, until 1991, major insurance companies almost always were financially able to meet their obligations. Consequently, many people fell into the habit of taking the financial strength of companies for granted.
A new era began on April 11, 1991, when Executive Life was seized by regulators. The public then learned it is possible for a major company to fail. Since then, several other large companies have been taken over by regulators.
There is no guarantee for insurance policyholders similar to that provided to most bank customers by the Federal Deposit Insurance Corporation. Instead, insurance companies are assessed through state guaranty associations to cover the losses of failed companies.
Despite the existence of guaranty associations, policyholders of failed insurance companies face uncertainties, delays, aggravation, and possible losses. In some recent cases where companies were taken over by regulators, significant changes received court approval.
In one case, interest-bearing liens were placed on the cash values. In another case, the minimum interest rate guaranteed in the policies was reduced. In yet another case, death benefits were significantly delayed.
Under the circumstances, it is not surprising to find widespread public concern about the financial strength of insurance companies. Because financial analysis is complex and requires specialized knowledge, you should rely on the opinions expressed by rating firms that are in the business of evaluating the financial strength of insurance companies.
Although the rating firms generally do a good job of evaluating the financial strength of insurance companies, ratings are not perfect because no one has 20/20 foresight.
A rating is an expression of the rating firm's opinion about the financial strength of the company. Thus a high rating is not a declaration that the company will survive; rather, the higher the rating, the greater the likelihood that the company will survive.
The opinions of rating firms about the financial strength of any particular company often are similar; however, opinions sometimes differ. For that reason, you should obtain several opinions by checking the available ratings of a company in which you are interested. Also, if possible, you should read the rating firms' actual reports on the company.
You should not rely on what insurance companies say about ratings or reports, because a company may try to put itself in a good light by mentioning ratings without indicating what they mean, or where they fit among a rating firm's categories. Also, a company may mention positive points in rating firms' reports and omit negative points.
Many rules of thumb may be constructed to help you select a financially strong company. We suggest you select a company with high ratings from at least two of the four rating firms shown in the table below.
If you want to be very conservative, we suggest you define "high ratings" as indicated in the table. When the September 2008 issue of The Insurance Forum went to press, 123 companies had high ratings according to that definition.
If you already own a policy, you should be careful if you consider replacing it. Although the relative financial strength of the original company and the replacing company is an important factor in your decision, you should consider other factors as well: your state of health and other items affecting your eligibility, the cost of getting out of the original policy (many policies provide for substantial surrender charges), the cost of getting into the replacement policy (many policies have substantial front-end expenses), the income tax implications of a replacement, the incontestability clause, and the suicide clause.
You should also try to determine the amount of compensation that the person advising you to replace the policy will receive if you follow the advice. Some who recommend replacement are motivated by a genuine desire to help you reduce your expenses or avoid the problems that may arise if your original company gets into financial trouble; nevertheless, you should be on guard. 
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