How to Select a Great Insurance Company
What makes for a great insurance company? To students of business history, a great insurance company is one with a long history of successful operation, a tradition of innovation, and the ingrained habit of serving their customers well. Several U.S. companies fit this description, with corporate pedigrees tracing back to the nineteenth century and product-development resumes including such landmark items as whole-life insurance, accident insurance, workman’s compensation, health insurance, universal and variable life insurance, immediate and deferred annuities, and variable annuities.
To securities analysts and portfolio managers, a great insurance company is one with a solid track record of earnings growth and capable management. Once again, various insurance companies have succeeded in attaining and maintaining high rates of return.
To insurance consumers, the elements of a great insurance company include fragments of the foregoing, plus something more. Low insurance premiums, prompt payment of claims, flexibility in devising contracts and honesty in honoring them – these are the stuff of great insurance companies from the consumer point of view.
The number of insurance companies that qualify as great on all these counts is small indeed – they could be enumerated on the fingers of one hand. The concept of a great insurance company has special meaning to holders of annuities.
The Choice of Annuity Issuer
Annuities are issued by insurance companies. Typically, an annuity contract culminates in payment of guaranteed lifetime income to the holder. Even when the annuity holder chooses not to annuitize, he or she will still entrust funds to the company for investment purposes over a period of years. The contractual promises in the annuity are underwritten by the company’s ability to pay out money to holders.
To annuity buyers, then, one aspect of a great insurance company stands out. The prime requisite for a great annuity company is sufficient financial strength and stability to make those payments for as long as necessary. It is in the annuity buyer’s interest to evaluate the insurance company’s financial strength.
At least four major rating agencies – A.M. Best, Standard & Poor’s, Moody’s and Fitch – evaluate the financial strength of insurance companies. A fifth – Weiss – has evolved into a serious competitor to the Big Four. Each agency has their own codified rating system, which is unique to that company. Rating systems are designed to be accessible to the intelligent non-specialist in finance and insurance.
Annuity purchasers should confine their attention to a choice between financially-sound companies. One sensible way to do this is to determine the minimally-acceptable rating under each agency’s system. Read the explanation for each rating category, starting with the highest rating. When you come to a category whose explanation connotes an unacceptable level of risk (A.M. Best’s “Vulnerable to unfavorable economic conditions,” for example), that means that the next-highest category is the lowest acceptable rating for that agency. Companies that meet minimal standards of financial strength for all rating agencies are candidates for annuity purchases. For example, New York Life holds the top financial-strength rating from all of the Big Four rating agencies, making it clearly acceptable under that criterion.
Next in importance comes the payout offered by the insurance company. Websites can perform the calculation of annual payout offered by different companies for a given sum of money paid immediately or accumulated. (They offer accumulation information on different deferred annuities as well.) The temptation to place this criterion first in order of importance should be suppressed. The most attractive payout in the world is worthless if the company is unable to make it. (An economist might fine-tune the process by discounting different payouts according to the level of risk implied by the financial-strength ratings.)
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Further Refining the Choice
The process described thus far has narrowed down the list of annuity issuers from several hundred insurance companies to a small handful. One would probably not go far wrong by picking the financially-strongest of these. There are various other considerations, however, that might affect the choice between companies. Specific comparison of annuity contracts is the only way to further differentiate between companies.
Insurance contracts contain options, like the optional features available when buying a car. For example, the death-benefit feature of the contract may offer several ways to structure payment to the beneficiary. Premium payments may be waived under certain carefully-specified conditions, such as the holder’s disability or diagnosis of terminal illness. Choosing the most favorable among these is another way of choosing between companies.
Riders are provisions that must be added to the policy in order to have legal force. These days, the best-known annuity riders are probably the “living benefits” in variable annuity contracts, which offer guaranteed minimum amounts of income, annual withdrawals, and rates of return. Again, these may be the basis for distinguishing between the products of different companies.
There are different ways of determining what makes a great insurance company, according to the perspective of the viewer. The views of historians, economists, and consumers all have something to recommend them. One certain conclusion is that the financial strength of the company underwrites its payouts, which in turn are the guarantee behind the promises made in the annuity contract. Thus, a great annuity company must be financially strong. Four major companies evaluate insurance-company financial strength, and a fifth keeps the other four honest. The ratings of these agencies allow insurance consumers to gauge the financial strength of an annuity issuer by determining minimal acceptable ratings for each rating agency.
Not far behind in importance is the payout offered by the company for a given purchase sum. Calculation websites can simplify the task of computing payouts offered by different companies.
Additionally, examination of competing policies can uncover fine distinctions between companies. Tailoring an annuity contract to an individual buyer involves picking the options and riders best suited to the buyer’s interests.
Picking a great insurance company is not quite an exact science because many variables defy precise characterization and prediction. By exercising due diligence in evaluating company financial strength and flexibility, the annuity purchaser can gain the best chance of success.
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