How is your life insurance rated? | Szymanski

Times of Trenton columnist Eleanore Szymanski

How safe is your precious nestegg after you make your deposit and send off your check? Whether you have built that nestegg over very long periods of time or inherited it from others who did so, it is important to be aware of safeguards that are (or are not) in place for your protection.

Most folks are familiar with the fact that some accounts are protected by insurances:

  • Bank accounts are covered by Federal Deposit Insurance Corporation (FDIC) up to specific limits.
  • Brokerage accounts are covered by the Securities Investor Protection Corporaton (SIPC) up to specific limits. Additionally, most brokerages carry private insurance coverage that is significantly in excess of SIPC limits.

With other publicly-offered accounts, such as mutual funds, investors must rely on the evaluation of professionals. Because regulations require these entities to publish and report information about their business conduct, professional watchdogs are able to evaluate, track, and rate the performance of these companies. Many entities evaluate mutual fund performance, including Consumer Reports, Morningstar, or Barrons.

With investments in banks, brokerages, and mutual funds, it is relatively easy to move accounts from one custodian to another. Investors who are not satisfied with performance of a specific mutual fund can easily cash in and have the proceeds in hand in a very short period of time–many times with a click or a phone call.

But another category of investment–life insurance and annuity products–involves relatively huge sums of dollars that are literally tied up for decades of time and are not so easy to get out of. These investments are fraught with major tax and personal considerations, including surrender charges. Unlike putting money in the bank or investing in a mutual fund, investing in life insurance and annuity products usually means signing up for the rest of your life. You want that insurance company to be there some time in the distant future when it is time to pay up. How that insurance company is managed is a big deal. And just because the company name is familiar and has been around for years, there is no guarantee that it will be around in the future. It is critically important to know how to check on the insurance companies themselves. Also, for investors who find their insurance company to be poorly rated and troubled, it is important to know how to move all or part of your life insurance/annuity to a safer and better managed place.

Four different ratings agencies evaluate and rate life/health insurance companies for many important factors, including financial strength, management and ability to meet financial obligations. Each rating agency assigns one of 21 differently-ranked letter-type rankings to each insurance company based on their in-depth evaluation. Sometimes the insurance company provides non-public information to the ratings agency and sometimes they even pay for the ratings. The September 2013 issue of “The Insurance Forum” provides the following information which may be helpful to investors in applying these ratings to their own life insurance or annuity products:

“We suggest you choose a company with high ratings from at least two of the four rating firms {AMBest, Fitch, Moody’s and S&P}:

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† If you are extremely conservative, we think “high ratings” should be defined as follows:

  • BEST: A++, FITCH: AAA, AA+, MOODY’S: Aaa, Aa1, S&P: AAA, AA+

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† If you are very conservative, the definition of “high ratings” should be expanded as follows:

  • BEST: A++, A+, FITCH: AAA, AA+, AA, MOODY’S: Aaa, Aa1, Aa2, S&P: AAA, AA+, AA

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† If you are conservative, the definition of “high ratings” should be further expanded as follows:

  • BEST: A++, A+, A, FITCH: AAA, AA+, AA, AA-, MOODY’S: Aaa, Aa1, Aa2, Aa3, S&P: AAA, AA+, AA, AA-“

As you can see, an A+ rating would intuitively sound like the top rating for anything, but not so with insurance companies. As you can also see, all of the above selections only recommend that conservative investors choose products of insurance companies who are ranked in the top 4 (of 21) categories. Those owning a poorly-rated insurance company product do have several available options to salvage their precious nestegg. Some may choose to cash in. Those who really need to maintain the life insurance coverage or annuity can transfer those products over to a better-rated insurance company through what is called a “1035 Exchange”. A 1035 Exchange is a provision in the tax code which allows a policyholder to transfer funds from a life insurance, endowment or annuity to a new policy, without having to pay taxes. With this exchange, life insurance can be exchanged for another life insurance or annuity contract, but an annuity cannot be used to be transferred into a life insurance policy.

Many factors are involved with cashing in or transferring life insurance and annuity contracts, including tax issues, potential surrender charges, changes in available coverage, amount of needed coverage, as well as health issues. All of these factors differ from person to person, depending on age, health, size of investment and financial situation. For these reasons, those considering any change of an insurance company contract or product should consult a fee-only financial planner to evaluate individual needs and options available before making any such moves.

Want to know more about how insurance companies and their products? Here’s an easy-to-read excellent resource: “Life Insurance: A Consumer’s Handbook”, by Joseph M. Belth, Indiana University Press, Bloomington, Indiana.

Eleanore K. Szymanski is a fee-only Certified Financial Planner Practitioner and principal of The Financial Planning Answerplace, LLC and EKS Associates of Princeton. You may send questions to her at or

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