It’s Time to Check Health of Your Life Insurer
Few consumers were concerned about the health of their life insurance companies a few years ago. That’s because life insurers were generally considered big, strong and dull. Far too dull to fail.
However, all that changed last year when six of the nation’s biggest life companies fell like a handful of dominoes. Within a matter of months, more than a million consumers who had insurance policies and annuities with Executive Life Insurance Co., Executive Life of New York, Fidelity Bankers Life, First Capital Life, Monarch Life and Mutual Benefit Life found their accounts were frozen and future payments were in doubt.
The bulk of these individuals will eventually recover their money, but 1991’s rash of failures underscored one unpleasant truth: An insurance company failure is nothing like the failure of a federally insured bank or savings and loan. When a bank fails, its customers’ deposits are protected to $100,000 by the federal government. If customers want to withdraw their money, they can usually get it immediately after the failure. The Federal Deposit Insurance Corp. simply writes them a check.
But there’s no FDIC in the insurance industry. Instead, life insurance accounts are protected by a patchwork of state-operated guarantee associations, which all have different rules and different levels of coverage. Consequently, how well you survive a life insurance company failure is partially dependent on where you live, what type of policy you have and where your insurer is headquartered.
In addition, before insurance guarantee associations can write you a check, they need to collect money from their members. And they can only collect a set amount each year. That means it can take years to get paid off if you happen to be the victim of an insurance company failure.
Does all this mean you should avoid buying life insurance? No. But consumers should be careful to periodically check on the financial health of their life insurer. And there’s no better time for that annual check-up than now.
September is when Joseph Belth, editor of the Insurance Forum, comes out with his annual life insurance ratings issue. It is arguably the most comprehensive consumer guide to life insurer health available anywhere. And at $10 a copy, it’s cheap.
Notably, Belth, who is also a professor of insurance at Indiana University’s School of Business, does not rate insurers himself. He simply compiles and organizes the ratings issued by the four established rating services--A. M. Best, Standard & Poor’s, Moody’s and Duff & Phelps. (It’s worth mentioning that these services generally charge upwards of $100 per directory. However, many are carried in public libraries.)
Belth also includes information about the insurance regulators’ so-called IRIS ratios.
IRIS, which stands for Insurance Regulatory Information System, is an analysis of insurer health developed by the National Assn. of Insurance Commissioners--the closest thing to a national regulator in the insurance industry. The complex IRIS system examines how closely 12 ratios compare to industry norms. Regulators then analyze this statistical data to determine how closely they should monitor each company. The analytical information is kept confidential. But the statistical information is publicly available.
The NAIC acknowledges that the companies that score outside the normal ranges in four or more categories are generally the ones that warrant closer scrutiny. Belth’s report lists these companies and gives a brief explanation of where these companies have deviated from the averages.
An IRIS score of four or more does not indicate that the company is teetering on the verge of failure, Belth cautions, but it does signal that the insurer’s finances bear closer consideration. If your insurer is on this IRIS list, you should be particularly careful to note how it rates with the services such as Best and Moody’s, he adds.
In short, this little guide gives you most of the information you need to know when considering buying or switching life insurers.
If you are thinking about buying a life insurance policy, you probably want your insurer to have very high ratings from at least two of the four rating services, Belth says in his report. If you already have a policy, however, your standards probably needn’t be as stringent.
Canceling one whole life policy and buying another is costly and difficult. Consumers should consider several factors, including their current insurability, before making a switch, he notes.
Insurance Forum’s annual ratings issue can be ordered by sending a check for $10 to: The Insurance Forum, P.O. Box 245-T, Ellettsville, Ind. 47429.
