Researching the financial health of your life insurance company is just as important as researching prices and coverage options when you are shopping for an insurance policy.
Financial-strength ratings are especially important for life insurance because you want to be assured that your insurer will be around in 10, 20 or 30 years -- or whenever you pass away and your beneficiaries go to claim the insurance money.
Yet financial-strength ratings are probably the most ignored component of the life insurance buying process.
You should always keep tabs on your insurer. If you see it mentioned in the news, take a closer look. Here are three ways to evaluate life insurance companies:
Ratings: Financial muscle
- Watch the video to the right for more life insurance advice.
A company's rating is a barometer of its ability to pay a claim down the road. A high rating indicates the company has plenty of assets and reserves available to pay claims. Because a life insurance claim is usually made many years after you purchase a policy, it's important to keep an eye on your company's financial strength.
Any number of factors can influence a rating. If a company makes some bad financial decisions and begins losing money, its rating could drop. Mergers -- or even the news of a merger -- can influence ratings.
You can find current S&P ratings with Insure.com's Insurance Company Ratings Lookup Tool. Each rating company has its own grading system, so slight variations are normal. You can't compare the "A" rating of one to the "A" rating of another.
Be aware that not all companies choose to be rated by every service, because rating services charge a substantial fee for such comprehensive reviews.
Ask your state
The insurance industry is regulated at the state level. That means each state has a different way of dealing with insurers and the consumers who complain about them.
Many states compile complaint reports each year, tallying the number of complaints made against insurance companies and ranking them in relation to their market share. If your state has such a report, you can better keep tabs on your insurer.
How many complaints are too many? There are no hard and fast rules, but if your insurer is continually at the top of the list for complaints, it may be cause for concern. Complaints can stem from a bad experience with an agent to a misrepresented policy, to a problem with getting a claim paid.
Industry certification
In order to gain membership in the association, a life insurance company must undergo rigorous scrutiny by independent, qualified evaluators. The group's approval indicates a company maintains high standards, particularly in sales, marketing and customer service. See the association's Web site for more.
So what does this mean? Since it's a designation created by the industry itself, you shouldn't put too much emphasis on association membership. For one thing, the association itself isn't an enforcement group. Though it can revoke certification should a member break the rules, it doesn't have any power to fine or sanction offending members. In practice, a company could garner numerous customer complaints and still be a member.
Membership is granted for three-year periods, so if the association drops its endorsement of your insurance company, that should raise a red flag.