Why Financial Strength Matters When Choosing a Life Insurance Policy

The Importance of Financial Strength for Life Insurers

Financial strength assesses an insurer’s ability to pay out the benefits promised.

If you have a cash value to your policy, you'll want to be sure you can get the cash if you need it.

You'll also want to be certain your insurer pays out the death benefit to your loved ones.

Strong and stable life insurance companies are more likely to be able to pay out claims.

Where can I find a life insurance company's financial strength rating?

Financial strength ratings of insurers are issued by credit rating agencies.

Do a quick online search.

Type in [Name of life insurance company] + financial strength rating.

This should throw up results for the financial strength rating of the insurer you are looking to use.

Dig deeper and credit rating agencies will give you the financial health of your insurer.

Websites of major life insurers will list their credit rating too.

What is a credit rating agency?

A credit rating agency assesses the financial strength of companies including life insurers.

These independent agencies review and report on the financial stability of companies.

The biggest rating agencies are Standard & Poor’s (S&P), Fitch Ratings,  Moody’s Investor’s Services and A.M. Best.

What are Financial Strength Ratings?

The world's largest credit rating agency S&P states:

"A financial strength rating is a forward-looking opinion from a credit rating agency about the creditworthiness of an insurer with respect to its current and future financial obligations."

Ratings are based on an insurance company's liquidity, profitability, investments and liabilities.

Each credit rating agency has its own individual rating system.

Life Insurance Financial Strength Ratings Explained

Investment-grade
The highest financial strength ratings awarded by the rating agencies are AAA, AA, A.

A life insurance company holding one of these grades is considered very strong or strong. It doesn't get better than this.

Ratings then drop down to BBB which is 'adequate' in its ability to meet its financial commitments.

In other words, it's the ability to pay out the promised benefits of your life insurance policy.

All these ratings are investment grades.

Non-investment grade
The next set of financial ratings are BB and B which are non-investment grade, or 'junk' status.

If a life insurer has a non-investment grade rating, it means it's likely to suffer a default. Which means it won't be able to meet its promises to policyholders.

Alphabet Soup
Different letters from different rating companies.

To the layman, it can seem like an alphabet soup.

It's not uncommon to see different ratings awarded to the same life company.

For example, an A+ rating is the second-highest grade from the agency A.M. Best. But it's only the fifth-highest for S&P and Fitch agencies.

So it's a good idea to compare ratings across different agencies when choosing an insurer.

Credit Rating Agency Ratings

Here's a list of the credit ratings from different agencies.

A.M. Best

• A++ (Superior)
• A+ (Superior)
• A (Excellent)
• A- (Excellent)
• B++ (Good)
• B+ (Good)
• B (Fair)
• B- (Fair)
• C++ (Marginal)
• C+ (Marginal)
• C (Weak)
• C- (Weak)
• D (Poor)

Fitch

• AAA (Highest quality)
• AA (Very high quality)
• H (High quality)
• BBB (Good quality)
• BB (Speculative)
• B (Highly speculative)
• CCC (Substantial credit risk)
• CC (Very high credit risk)
• C (Near default)
• RD (Restricted default)
• D (Default)

Moody’s

• Aaa (Highest quality, with minimal risk)
• Aa (High quality, with very low credit risk)
• A (Upper-medium grade quality, with low credit risk)
• Baa (Medium-grade quality, with moderate credit risk)
• Ba (Medium-grade quality, with substantial credit risk)
• B (Medium-grade quality, with high credit risk)
• Caa (Poor quality, with high credit risk)
• Ca (Poor quality, and likely to or nearing default)
• C (Lowest quality, with little prospect for recovery)

Standard & Poor's

• AAA (Extremely strong)
• AA+ (Very strong)
• AA (Very strong)
• A+ (Strong)
• A (Strong)
• BBB+ (Strong — adverse conditions could affect its capacity to meet financial commitments)
• BBB (Strong — but a change in circumstances could make it vulnerable to nonpayment)
• BB+ (Speculative)
• BB (Speculative)
• B+ (Speculative)
• B (Speculative)
• CCC (Significantly speculative - adverse conditions could affect the ability to pay claims)
• CC (Significantly speculative)
• C (Significantly speculative)
• D (Default or bankruptcy)

Financing Life Insurance

A benefit of an insurer having a strong credit rating is that its life insurance policies can be financed. The financial strength of the insurer means banks and premium financing companies will lend money to high net worth individuals to buy a policy. The premium financing life insurance market is estimated at $2 billion+ a year.

Largest Global Life Insurance Companies

There are hundreds of life insurance companies to choose from. From local to international life insurers.

Different insurers will also offer different products.

High net worth individual (HNWI) clients like term insurance and whole of life insurance.

The following global life insurers offering these types of cover.

AIA credit rating

Prudential credit rating

Manulife financial strength

Sun Life financial credit rating

Transamerica credit rating

Reviewing Insurer's Financial Strength Ratings

The financial state of an insurance company can change during adverse financial conditions.

Rating agencies track the health of insurers on an ongoing basis.

Financial advisers and wealth managers use credit ratings in their product suitability reviews. Rating agency reports will form part of due diligence on insurers they recommend.

If you bought your policy through a financial adviser, they can provide updates. Your adviser can also make recommendations for any changes.

Conclusion
Insurance company financial strength ratings are a key factor when deciding which insurer to buy a life policy from.

Policy type, features, benefits and customer reviews also need considering.

And finally the cost of the policy.

Financial strength does not guarantee a life insurance company's future. But, it should give some comfort that the insurer has a strong and stable future.

A long-held high credit rating is also reassuring.

It indicates that the life insurance company has met all existing, and can meet, all future claims.