Jeffrey Wade
Life insurance is a big commitment — policies can last up to 30 years or even your whole life. So, when you're shopping for life insurance, it's important to look beyond the rates and consider the type of company you're buying from. Life insurance company ratings are independent assessments of the financial health of the insurance company, and its ability to meet long-term insurance obligations. This includes its ability to pay policyholders' claims. The healthiest people with the safest lifestyles are placed in categories that qualify them for the lowest rates.
| Characteristics | Values |
|---|---|
| Purpose of life insurance ratings | To help consumers make informed decisions about which insurance company to buy from |
| What the ratings assess | The financial health of the insurance company and its ability to meet long-term insurance obligations |
| Criteria used to rate insurance companies | Debt ratio, diversification of revenue streams, risk management practices, net income, combined ratio, policyholder surplus, etc. |
| Rating agencies | A.M. Best, and three others |
| Rating scales | Each rating agency has its own rating scale |
| Applicant assessment factors | Age, current health, medical history, occupation, family health history, lifestyle choices, etc. |
| Rating classes | Preferred Select, Preferred, Non-Tobacco, Preferred Tobacco, Standard Tobacco, etc. |
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What You'll Learn
The financial stability of the insurance company
Life insurance is a big commitment—policies can last up to 30 years or even for the rest of your life. Therefore, it is important to ensure that the insurance company you are buying from is financially stable and capable of fulfilling its financial obligations.
Third-party insurance company ratings help you understand the financial health of the insurance company. These ratings assess an insurance company's ability to meet long-term insurance obligations based on criteria such as debt ratio, diversification of revenue streams, and risk management practices. They also indicate the company's ability to pay policyholders' claims.
An insurance company's financial strength rating is an assessment of the company's ability to meet its obligations in the face of economic conditions and changes in market value. Indicators commonly used to assess financial strength include net income, combined ratio, and policyholder surplus.
When shopping for life insurance, it is important to look at a company's financial strength from multiple rating agencies. This is because each rating agency has a different ratings scale, and agencies can announce rate changes at any time. Therefore, it is recommended to check annually on the ratings of any company that you might be interested in.
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How to decode ratings from different agencies
When shopping for life insurance, it is important to look at a company's financial strength from multiple rating agencies. This will indicate their ability to pay future claims. Ratings agencies typically assign life insurance companies one of nine to sixteen long-term financial strength ratings. The highest ratings indicate that the company is very likely to be able to pay out future claims, whereas the lowest ratings mean a company may be unable to pay future claims and could be at risk of collapse.
The four key third-party rating agencies are A.M. Best, Fitch Ratings, Moody's and S&P Global Ratings. Each agency has its own unique system and rating scale, so it is important to consult the agency's financial strength rating scale when comparing insurers' ratings. For example, A.M. Best's strongest financial ratings are A++ and A+, while the best from Fitch and Standard & Poor’s are AAA and AA. The top ratings at Moody’s are Aaa and Aa.
It is worth noting that agencies can announce rate changes at any time, so it is important to check annually on the ratings of any company that you might be interested in. It is also important to be aware of potential conflicts of interest within the industry, as the ratings agencies are paid by the companies they evaluate.
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The impact of an individual's health and lifestyle on their rating
An individual's health and lifestyle have a significant impact on their life insurance rating. When applying for life insurance, an individual's current health, age, and medical history are assessed. The insurance company will also consider their lifestyle, family medical history, driving record, and whether they smoke.
The insurance company uses this information to determine an applicant's risk class, which in turn determines the premium they will pay. The better the health class or rating, the lower the premium. This is because better health equals less risk for the insurance company, and less risk equals lower premiums.
An individual's current health is evaluated through a medical exam that measures their vital signs, including height, weight, blood pressure, and cholesterol. Their medical history, including past and current health problems, treatments, and prescription medications, is also taken into consideration.
Smoking status has a notable influence on life insurance ratings. Smokers are considered higher-risk due to the increased likelihood of health problems, and they often face substantially higher premiums than non-smokers. Some insurance companies also classify e-cigarette and marijuana users as tobacco users.
In addition to smoking, other risky behaviours can impact an individual's rating. These include drinking and drug use, and participation in dangerous hobbies such as scuba diving, skydiving, or piloting a plane. A family history of serious medical conditions, such as cancer or heart disease, can also result in higher rates.
It is important to note that not all insurance companies follow the same rating criteria, and it is possible to obtain a more favourable rating by applying to a company that views specific situations more favourably.
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The underwriting process and how it determines an individual's risk factor
The underwriting process is a critical function of insurance companies, involving the research and assessment of risks associated with each applicant. Underwriters are professionals who understand insurance risks and how to avoid them. They assess the risk of insuring individuals who apply for life insurance policies and determine the types of policies and coverage outlines suitable for their unique circumstances.
The underwriting process involves an initial review of the insurance application and supporting documents to determine the acceptability of a submission. If the submission meets the company's risk criteria, the underwriter will approve it and move to the rating process. If the submission is within the company's risk appetite, a deeper analysis of the risk is conducted to determine if it is acceptable without modifications or if changes are required. The underwriter may suggest deductible options, limits, or other modifications to make the risk acceptable.
Underwriters assess an individual's risk factors by considering various aspects of their life, including their health, behaviour, family history, driving history, location, and finances. They may also consider an individual's credit score, although this is a controversial practice. The health rating is a significant factor, with insurance companies typically having separate ratings for smokers and non-smokers. An individual's current health, medical history, and vital signs are evaluated, with better health resulting in a lower premium due to reduced risk for the insurance company.
The underwriting process aims to ensure that the insurance company is writing business that aligns with its risk appetite and strategic plan. By assessing the degree of risk each applicant brings, underwriters help set fair premiums that adequately cover the cost of insuring policyholders. If the risk is deemed too high, the underwriter may refuse coverage.
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How to get the lowest rates
Life insurance is a crucial financial safety net for your loved ones, and getting the best rates can significantly impact the cost of your policy. Understanding why life insurance ratings matter is essential to securing the most favorable terms. Life insurance ratings assess the financial strength and stability of insurance providers. These ratings indicate their ability to fulfill their obligations, including paying out claims. A highly-rated insurance company is more likely to be reliable and secure, ensuring that your beneficiaries receive the intended benefits when needed.
Now, here's how you can obtain the lowest rates for your life insurance policy:
First and foremost, maintain a healthy lifestyle. Your health is a significant factor in determining your life insurance rates. Engage in regular exercise, maintain a balanced diet, and avoid harmful habits such as smoking or excessive alcohol consumption. Insurers will often request a medical exam, and factors like blood pressure, cholesterol levels, and weight can influence your rating class and subsequent premium. Leading a healthy lifestyle can help you secure better rates and potentially extend your life expectancy.
Don't underestimate the power of comparison shopping. Rates can vary significantly between insurance providers, so it's worth comparing quotes from multiple companies. Consider using online tools or working with an independent insurance agent who can provide quotes from several insurers, helping you find the most competitive rates for your desired coverage. Remember to compare not just the premiums but also the policy details, benefits, and financial strength ratings of the companies.
Another strategy is to opt for a higher deductible. Similar to other types of insurance, choosing a policy with a higher deductible can lower your premiums. This means you'll pay less annually for your life insurance but will have to cover a larger amount out of pocket if the policy has a cash value loan provision and you decide to take a loan against the policy. Consider your financial situation and comfort level with risk when deciding on the deductible amount.
Bundle your policies whenever possible. Many insurance companies offer discounts if you purchase multiple types of insurance from them, such as life, home, and auto insurance. Bundling your policies can lead to significant savings on your overall insurance costs. Ask your insurance provider about any available discounts for bundling or for having multiple policies with them.
Finally, pay attention to timing. The sooner you purchase life insurance, the better, as rates tend to increase with age. Buying life insurance when you're younger and healthier can lock in lower rates for the long term. Additionally, consider the timing of your payments. Some insurers may offer a slight discount if you pay annually instead of monthly, saving you a small amount over time.
By following these strategies and maintaining a long-term focus on health and financial responsibility, you can obtain the lowest rates for your life insurance policy, ensuring that your loved ones are well-protected at a cost that fits within your budget. Remember that life insurance is a vital component of your overall financial plan, and choosing a highly-rated insurer provides added peace of mind.
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Frequently asked questions
A life insurance rating is a rating category that determines how much you'll pay for coverage. The healthiest people with the safest lifestyles are considered the least risky and are placed in categories that qualify them for the lowest rates.
When you apply for a life insurance policy, several factors determine what rating you will be given. The company will review medical, non-medical and financial risk factors from your life insurance application and medical exam results, if required.
Some factors that determine your rating include your age, gender, occupation, family health history, overall health status, and lifestyle choices such as smoking or participating in hazardous activities.
When shopping for life insurance, it is important to consider not only the rates but also the type of company you're buying from. Look at their financial strength rating (FSR) from third-party rating agencies to assess their ability to meet long-term insurance obligations.
Yes, your life insurance rating is not always permanent. A change in lifestyle and improving your overall health can help you revise your rating and qualify for lower rates.
