At some point during the process, most life insurance shoppers ask us, "How do I know whether or not this is a reputable insurer? Can I trust this company?"
It’s an extremely important question. Unlike a restaurant or a store, you need to make sure that the company is still going to be around in thirty years. While no one can predict the future, there are ways to assess the risk that a life insurance company could go under.
While your first instinct may be to check consumer review sites (Yelp for life insurers?), they’re usually not particularly helpful when it comes to insurance companies. There’s very little motivation for customers who’ve had positive experiences with life insurance companies to leave reviews. For beneficiaries of life insurance policies, the positive experience with a life insurance company comes at an incredibly emotional period of their life. The last thing they’re going to do is go online and become a brand advocate for an insurance company.
Therefore, most consumer reviews of insurance companies are written by the angriest minority of customers. They’re also often reviewing the wrong product. Since some insurance companies can offer a wide variety of insurance products, it can be easy for a disgruntled customer to leave a review of her auto insurance on the life insurance page, for example.
Here are the facts about life insurance companies that most consumer review sites won’t tell you:
It’s a super regulated industry.
It’s very rare that a life insurance company doesn’t pay out on a policy.
The overwhelming majority of customers are happy with their life insurance policies.
If you do want to check out consumer reviews, we suggest the Better Business Bureau.
However, none of that answers the initial questions: how do I know this company will be around in thirty years?
What you want is a review of a company’s financial stability. There are multiple sites that you can visit that assess the financial stability of insurance companies:
Standard & Poor's
Each of these sites will rate companies on different criteria and different grading systems. When you look at a rating on one of these sites, make sure you read up on how that company grades companies so that you know what a grade means.
As an example, let’s look at A.M. Best’s rating system, since they focus specifically on rating life insurance companies. They use a pretty standard letter grading system. A company with an A+ rating has "a superior ability to meet their ongoing insurance obligations," A is "excellent," and B+ is "good." Everything below that is "vulnerable to adverse changes in underwriting and economic conditions."
However, A.M. Best also has "rating notches" in order to "reflect a gradation of financial strength within the category." Basically, some companies can be double-plus good or double-plus superior, while others can have negative notches.
Those small details don’t really matter to the consumer, however. Basically, you want to figure out what the cut-off point is. Whenever you’re looking at a rating guide, ask yourself, "At what point should I not feel comfortable with the rating given to a company?" With A.M. Best, that cut-off point would probably be at B+.