Life Insurance Company Ratings: What Do They Mean?

The Race of Numbers

When choosing the insurance company in which to invest in, it is very important that you have an idea of which ones are the strongest financially. After all, if you invest in an insurance company that goes bankrupt, what happens to all the premiums that you paid all those years? That’s right – nothing.

You are buying insurance so you can have a measure of security. First, however, you should make sure that the entity securing you is indeed secure. In periods of great prosperity, most insurance companies can’t seem to do anything wrong. New companies will even come in and take their share of the market from the industry leaders, often by lowering their premiums and loosening their requirements. However, most of these companies will also go bankrupt during the next recession or depression, thereby leaving their customers even less secure than before.

To the casual observer, it might seem impossible to gauge the financial strength of an insurance company, and yet this is the most important aspect of the insurance buying decision. Fortunately, life insurance company ratings exist, and they are of tremendous use to those who want to know what they are putting their money into.

What Life Insurance Company Ratings Mean

Insurance company ratings are simple measures of an insurer’s financial strength. Three organizations are mainly the source of the ratings: Moody’s and Standard and Poor’s. These two organizations assign letter rankings to many companies, usually ranging from A to D, with A being the highest and D being the lowest.

Here’s an example involving two insurance companies, Company Y and Company Z. Company Z is a dominant prosperous company with good earnings figures for over 50 years. It has little outstanding debt, reasonably priced-premiums, and many policyholders. Because of its exceptional financial strength, Standard and Poor’s gives it a rating of AAA – which means there is very littler risk of default on the company’s part. Similarly, Moody’s, seeing the same elements, might give the company an Aa3 rating.

On the other hand, Company Z has been a struggling company for the last twenty years. It has a lot of debt but can’t scare up the cash to pay them down. Thus, it is given a ranking of CCC by Standard and Poor’s, and maybe Ca by Moody’s. This rating indicates that it is a speculative company – there is a significant amount of risk. If and when the company goes bankrupt, it will receive a rating of D.