Why a Company’s Credit Rating Impacts Your Term Life Insurance Price

Not all insurance companies are created equal, and therefore, this discrepancy can influence term life insurance prices.  Although you may be enticed by a low term life insurance quote, make sure that the company is in good business standings – or else, your beneficiaries may find themselves with little protection should the unfortunate occur.

The Significance of Credit Ratings

Like any other business industry, some insurance firms have greater financial stability than others.  While a company may offer you the lowest term life insurance rate, if their financial wherewithal is questionable, the money you save in your premiums is not worth the risk.

When you are analyzing your term life insurance price quotes, take the time to check into the credit rating of the insurance company.  You can conduct research directly at the rating agencies, or ask the insurance company representative what the recent ratings are.  Moody’s, Standard and Poor’s, and A.M. Best all rate and track the insurance companies.  Whereas each one has nuances in their ratings, they follow the same logic of grades, with AAA being the best, followed by AA, A, BBB, BB, B, and so forth.

According to Standard and Poor’s, who also shares a very similar grading system as A.M. Best, the strongest life insurance companies have a rating of AAA+, while acceptable credit ratings are BBB.  If the insurance company has a credit rating of BB or lower, you want to exhibit caution.  A BB rating typically is considered “speculative,” with a greater rate of default – while any firm graded with a C or D is a life insurance company you do not want holding your policies.  Their chance of defaulting on the death benefit is tremendously high.

If you are reviewing Moody’s ratings, their scale utilizes Aaa as the best, followed by Aa, A, and Baa.

Ideally, you should opt for the insurance companies that have an A grade or higher.  Whereas some rating agencies categorize “B” as good or decent, do you really want to risk your family’s benefits should you pass away?

The Risk of Your Insurance Company Filing Bankruptcy

For insurance companies that are not financially healthy, their risk for bankruptcy increases – which means that the probability that your beneficiaries may lose out on benefits rises as well.  With that said, what happens if your life insurance company does declare bankruptcy? Does short term insurance price savings really warrant the risk?

If your life insurance company becomes bankrupt, you are still entitled to some benefits – although they may be significantly reduced.  For most states, there are “guaranty funds” that offer protection against insurance companies’ bankruptcies.

However, these funds are indeed limited, and usually offer coverage of approximately $300,000 across all types of policies.  Therefore, if you had purchased a $1,000,000 benefit policy, then you would possibly be $700,000 short in coverage – not boding well for your family should the unfortunate occur.

While there are provisions in place to help the consumer should a life insurance company fail, the coverage is limited – and it should not be a risk you would impose on your family.

Indeed, some financially weak companies may offer you a low term life insurance price quote, but the minute savings are not necessarily worth the risk.  Considering that term life insurance quote rates are typically only a few hundred dollars a year, attempting to save an extra $50 annually does not constitute enough savings for a great risk.  Effectively choosing a great term life insurance rate means finding the company that has the most financial stability.