Evaluating A Life Insurance Business: Key Factors For Success

Evaluating a life insurance business is a complex process that involves assessing various financial and operational factors. The financial stability of a life insurance company is a critical aspect, and this can be determined by analyzing its income statements, investment income, capital, and ratings from third-party agencies. It is also important to evaluate the products and services offered by the company, such as different types of insurance policies, premium discounts, and customer resources. Additionally, the reputation and longevity of the insurance agent play a role in the overall evaluation of a life insurance business. Regular reviews of insurance policies are essential to ensure they align with the client's changing needs and life circumstances.

Evaluate the agent and the carrier

When evaluating the agent and the carrier, there are several key factors to consider.

Firstly, it is important to verify the agent's qualifications and licenses. Agents often sell products that their licenses permit, rather than what the client needs. For example, in California, agents need a NASD series 6 or 7 general securities license plus a California variable contracts license to sell variable insurance contracts. If selling in multiple states, the NASD series 63 license is also necessary.

Secondly, the longevity of an agent in the business is an indicator of their stability and likelihood of being around to service the client in the future. Given that 98% of insurance agents don't make it past the first three years, it is worth finding out what will happen to your client if the agent leaves the insurer.

Thirdly, the frequency of policy performance reviews is an important consideration. These reviews should ideally be conducted annually to ensure the policy continues to meet the client's needs and expectations.

Another factor to evaluate is the agent's independence. Agents who represent multiple carriers can provide more objective advice and are more likely to recommend a policy that suits the client's needs. However, some agents who represent several carriers give the right of first refusal to a particular carrier on any application.

It is also worth considering the agent's motivation and whether their recommendations are driven by the commission structure. Many carriers allow agents to make policy changes, enhance benefits, and reduce premiums. Exploring the agent's willingness to rebate part of the commission to the client, where legal, can provide insight into their motivation and potential conflicts of interest.

Finally, evaluating the carrier itself is crucial. This includes assessing the carrier's financial stability and risk profile. The carrier must have a strong financial rating, such as a minimum of AA by Standard & Poor's and Moody's and A+ by A.M. Best, to ensure it can survive at least as long as the client. Checking the carrier's investment portfolio for undue concentration in a particular sector or exposure to high-risk investments is also important. Carriers that write property and casualty policies may be more vulnerable to significant claims following natural disasters.

Review existing policies

When reviewing existing policies, it is important to consider the different types of life insurance available and how they might impact the policyholder. The two most popular types are term life and permanent life. Term life insurance covers a specific period, often 10 to 30 years, and is more affordable due to its limited duration and lack of cash value. On the other hand, permanent life insurance offers lifetime coverage and includes whole life, universal life, and variable universal life plans. Whole life insurance, a type of permanent policy, has a cash value that the policyholder can borrow or withdraw from while alive. Universal life insurance provides coverage as long as premiums are paid and offers premium flexibility. It is important to assess the suitability of these policies for the policyholder's needs and long-term financial goals.

When reviewing existing policies, it is crucial to compare the benefits and costs of different plans. Analyzing alternative scenarios can help determine the affordability and feasibility of continuing with the same policy. It is also important to explore whether the policyholder is getting the best deal. Some companies offer more favourable policies for new buyers, so it may be beneficial to switch to a different carrier for lower premiums, higher cash values, or larger death benefits.

Additionally, when reviewing existing policies, it is essential to consider the impact of life changes. For example, marriage, buying a house, changes in family size, career shifts, and retirement can all affect insurance needs. Policyholders should periodically re-evaluate their coverage to ensure it aligns with their current circumstances and adequately protects their loved ones.

Furthermore, when reviewing existing policies, it is worth considering the role of independent insurance agents. These agents can provide valuable insights and help policyholders navigate the complexities of insurance. They can assist in finding the best coverage, bundling policies for discounts, and ensuring that life changes are reflected in the insurance plan.

By following these steps and staying proactive, policyholders can make informed decisions about their existing life insurance policies, ensuring they have the right coverage to meet their needs and achieve their financial goals.

Compare quotes from multiple insurers

Comparing quotes from multiple insurers is a crucial step in evaluating a life insurance business and ensuring you get the best value for your money. Here are some detailed instructions and considerations to keep in mind when comparing quotes:

Firstly, understand the different types of life insurance policies available. The two most popular types are term life and permanent life insurance. Term life insurance covers a specific period, usually 10 to 30 years, and is more affordable due to its limited duration and lack of cash value. On the other hand, permanent life insurance offers lifetime coverage and includes whole life, universal life, and variable universal life insurance. Whole life insurance is a permanent policy that accumulates cash value, allowing you to borrow or withdraw funds during your lifetime. Universal life insurance provides coverage as long as you pay your premiums, offering more flexibility in premium amounts.

When comparing quotes, pay attention to the premiums, coverage length, and benefits offered. Consider your long-term goals and needs. For example, if you plan to keep your life insurance for an extended period, look for companies offering renewable options to avoid reapplying for coverage later. Additionally, think about the financial stability of the insurer. Check their ratings from independent agencies like A.M. Best, Fitch, Moody's, and Standard & Poor's. A higher rating indicates greater financial strength and claims-paying ability.

It's also essential to evaluate the insurance agent. Ensure they possess the necessary licenses and have been in business for a reasonable period. Longevity increases the likelihood of the agent being able to service your policy in the future. Assess their independence by considering the number of carriers they represent; more carriers suggest a more objective judgment. Inquire about their commission structure and willingness to rebate part of the commission to the client, where permitted by law.

Don't hesitate to seek quotes from three to five insurers to make an informed decision. Remember, life insurance companies provide various product options and discounts, so take your time to review the quotes thoroughly before making your choice.

Understand different types of life insurance

Understanding the different types of life insurance is crucial when evaluating a life insurance business. Here's a detailed overview of the various types of life insurance available:

Term Life Insurance

Term life insurance is a simple and cost-effective policy designed to replace your income if you die prematurely. It is typically sold in lengths of one, five, ten, fifteen, twenty, twenty-five, or thirty years. Most people opt for a term that covers their prime working years, ensuring that their dependents can meet short-term financial needs in the event of their untimely death. While term life insurance is generally the most affordable option, it's important to remember that it only provides coverage for a set period, and if you outlive the policy, your beneficiaries won't receive a payout.

Whole Life Insurance

Whole life insurance, on the other hand, is a permanent coverage option that lasts your entire life, as long as you keep up with the premiums. It offers a guaranteed rate of return on the policy's cash value, and the death benefit amount remains fixed. Whole life insurance is more expensive than term life insurance due to its lifelong coverage and the inclusion of a savings component that accumulates cash value over time. This cash value can be accessed through loans or withdrawals, providing flexibility to the policyholder.

Universal Life Insurance

Universal life insurance is another type of permanent coverage that allows for greater flexibility. It enables you to adjust your premiums and death benefit within certain limits. Similar to whole life insurance, universal life insurance has a savings component that grows over time, but the interest rate is not fixed and can change based on market conditions. One of the key advantages of universal life insurance is that it can eventually result in a zero-cost policy, where the built-up cash value covers the premiums.

Variable Life Insurance

Variable life insurance is a riskier form of permanent life insurance. It consists of a fixed death benefit and a variable cash value component that rises and falls based on the performance of selected investments. This type of policy provides more investment options, potentially leading to greater benefits for beneficiaries if the investments perform well. However, it also exposes the policyholder to higher risk, fees, and costs. Variable universal life insurance is a hybrid policy that combines variable life insurance with adjustable premiums, providing even more flexibility.

Final Expense Life Insurance

Final expense life insurance, also known as burial or funeral insurance, is a type of whole life insurance with a smaller death benefit designed to cover end-of-life expenses. It is more affordable and accessible to older individuals or those with pre-existing health conditions. The cash value of a final expense policy operates similarly to a whole life policy, accumulating value at a fixed rate over time.

Other Types of Life Insurance

In addition to the main types mentioned above, there are several other life insurance options:

• Group life insurance is typically offered by employers as part of their benefits package.
• Mortgage life insurance covers the outstanding balance of your mortgage and pays out to the lender upon your death.
• Credit life insurance is designed to pay off specific loans, such as a home equity loan, in the event of your death.
• Accidental death and dismemberment insurance (AD&D) covers death or serious injuries, such as loss of limbs or sight, resulting from accidents.
• Joint life insurance insures two lives under one policy, with variations including first-to-die and second-to-die payout options.

Assess the business's financial stability

When evaluating a life insurance business, it is essential to assess its financial stability to ensure the company will be able to meet its obligations to policyholders. Here are some key considerations:

Ratings and Third-Party Analysis

Life insurance companies are subject to rigorous analysis by third-party agencies, which assign ratings based on their financial strength and claims-paying ability. These ratings provide valuable insight into the company's stability and ability to fulfil its commitments. It is important to familiarise yourself with the rating agency's standards and grading scale, as these can vary. While a high rating is generally favourable, it is not a sole guarantee of financial stability, and other factors should also be considered.

Income Statements and Investment Income

Evaluating a life insurance company's income statements can provide insights into their financial health. While net income is important, it is not the sole indicator of a successful insurance company. It is crucial to delve into the operational income figures to understand how well the insurer can deliver value to policyholders. Additionally, investment income is a significant component of a life insurance company's profits. Monitoring how this income changes over time and comparing it with obligations to policyholders can help assess the company's financial stability.

Capital and Surplus

While income is a significant factor, capital also plays a role in evaluating financial stability. Analysing trends such as the growth in admitted assets and surplus over time is essential. Surplus acts as a crucial cash cushion that insurers can utilise during periods of insufficient cash flow. Regulatory calculated surplus components, such as the Asset Valuation Reserve (AVR), provide insights into the risk profile of the company's investments. Changes in AVR over time and relative to investment yield can be indicative of the company's financial health.

Trend Analysis

Evaluating a life insurance company's financial stability should involve analysing long-term trends rather than short-term data. Trend analysis helps understand how the company manages its business over time and how it adapts to changing circumstances. By examining multiple data points over several years, you can make more informed decisions about the company's financial trajectory.

Regulatory Environment and Rehabilitation

It is important to remember that life insurance companies operate in a highly regulated environment, and bankruptcies are rare. In the event that an insurance company faces financial difficulties, state intervention and rehabilitation processes are in place. If a company cannot be rehabilitated, it will be liquidated, and the state guaranty association will continue to provide coverage and pay death benefits to policyholders.

Frequently asked questions