As parents, we’re used to vetting options to make the right choice for our families, like checking reviews and safety recalls on car seats.
But other times, it’s harder to know where to get answers. Your friend may know a babysitter with CPR training, but is likely to come up short if you ask for a background check on a life insurance company.
Life insurance is supposed to provide you with peace of mind, but who’s making sure the insurance company can deliver on the promises in their policies?
Consider this your behind-the-scenes look at the organizations that regulate and guide life insurance.
When you put money in a bank, your deposits are protected by the Federal Deposit Insurance Corporation (FDIC). But FDIC protection doesn’t extend to life insurance policies, so other departments and organizations exist to monitor the industry and check that a life insurance company is financially sound.
At the federal level, the Federal Insurance Office (FIO) was created in 2010. The FIO monitors insurance markets for early signs of activities that could contribute to a financial crisis. It also monitors the extent to which everyone has access to affordable insurance, especially people in traditionally underserved communities.
One catch: The FIO doesn’t have regulatory authority. It serves in an advisory capacity only. For actual regulatory support, you’ll want to watch the National Association of Insurance Commissioners (NAIC).
The NAIC has been around since 1871. It acts as a central hub for state insurance regulators (i.e. elected or appointed officials) to compare notes. Government officials work through the NAIC to set best practices and standards. The NAIC also maintains several massive databases with information about insurance company acquisitions and mergers, licensed insurance producers and the world’s largest financial database on insurance companies.
States have a lot of freedom to set their own official regulations for insurers operating in the state. In general, most states follow a lot of the model regulations the NAIC develops, because it helps standardize the way insurance providers operate across the country.
Each state government, as well as the District of Columbia, has its own department of insurance. They exist to set and enforce regulations for insurance companies and protect consumers. For example, if someone passes away and the beneficiary doesn't step forward to claim the death benefit, insurers can't just keep the money. According to the Unclaimed Life Insurance Benefits Act, they must try to locate the beneficiary and keep the funds in a special, separate account if they can't.
There are a few of the measures states take to make sure life insurance companies are practicing the way they should.
Sean Liang, Senior Insurance Compliance Officer at the California Department of Insurance (CDI), writes, “The CDI requires insurers to obtain a certificate of authority to conduct insurance business in this state and to submit financial, rate, and product filings.”
This is standard practice for insurance providers across the country. Applying for a license to sell life insurance in a state usually involves submitting details about the kinds of products and policies the company offers, how they run marketing and their financial records.
If your life insurance policy isn’t backed by the FDIC, how do you know your life insurance beneficiary would actually receive the death benefit if you pass away?
States take the agreements in your life insurance policy very seriously. After an insurance provider gets approved and licensed in the state, the state department keeps checking in.
Stephen Briggs, Public Information Officer with the Arizona Department of Insurance and Financial Institutions, says, “As part of the life insurance application process, we review the financial condition of applicant insurers. As part of the examination process, we do a financial examination of domestic life insurers every five years.”
Briggs’s department conducts ongoing in-house analysis, including reviewing the financial condition of admitted insurers. He says, “Among other requirements, insurers are required to post reserves that are sufficient to cover the risk of loss that they are insuring.”
The schedule for how often state agencies review insurance companies can vary from state to state. Generally, though, you can expect that if an insurance company is licensed in your state, they need to submit regular updates on their finances.
Besides monitoring an insurance company’s ability to pay claims on the policies it sells, life insurance regulations also govern how companies treat consumers.
Liang explains, “The CDI also reviews insurers’ conducts to assure that their conducts do not constitute unfair methods of competition or unfair or deceptive acts or practices. In addition, the CDI provides consumer services to assist in investigating complaints and disputes filed by consumers.”
Most state insurance departments will offer a consumer hotline or another way of reporting an issue if you encounter an insurance company that isn’t acting fairly.
It’s pretty rare for a life insurance company to go bankrupt, even in tough economic times, and doing your homework can help you find a life insurance provider in good financial standing.
Still, it can be reassuring to understand what would happen if a life insurance company ran into financial trouble.
First, state departments work to help companies avoid financial insolvency. If extra monitoring and rehabilitation processes aren’t working, both Briggs and Liang say their departments can take action to have an outside party manage the company’s finances.
Briggs says, “If there’s a troubled insurer out there, the agency has the authority to request a court to put them under financial receivership in an effort to mitigate loss and ensure that all claims are paid.”
Once a struggling insurance company is under receivership, the first option is to find another company to buy out their book of business, taking over open policies and client accounts. As a last resort, states can turn to the guaranty fund, a state-administered fund that exists to protect insurance policyholders.
All 50 states, the District of Columbia and Puerto Rico have guaranty funds. Licensed insurers regularly contribute to the fund (the amount usually depends on the premiums they collect). If an insurance provider is insolvent, the state can draw from the guaranty fund to pay claims.
The guaranty fund won’t necessarily replace your entire policy. For example, Arizona’s life insurance guaranty fund protection is limited to $300,000, so if you have a $1 million policy, that’s a significant hit. Still, it’s better than having an insurance policy default and leave you with nothing. You can look up your state’s insurance department to learn more about how they use the guaranty fund.
When you’re getting ready to buy life insurance, there are a few places you can check on an insurance provider’s finances and business practices.
State insurance departments are there to protect the consumer. Often, they’ll provide information about complaints or issues so you can check out a company’s record for yourself. You can also confirm that a company you’re interested in is licensed in your state.
Moody’s, A.M. Best, Fitch and Standard & Poor’s are credit ratings agencies that can indicate a company’s financial health. They do a deep dive into financial records, funding and asset management to assess risk and assign a letter grade. A ratings agency grade isn’t a guarantee, but it’s often a good indicator of an insurance provider’s financial standing.
For example, Vantis Life, the company that underwrites policies sold by Fabric, has an A.M. Best rating of A+ (“Superior”).
Credit ratings agencies follow similar, but not identical, grading systems to each other. This can get a little confusing, because “AAA” might be a top rating at one agency while “A++” takes top spot in another. (Need a cheat sheet? We’ve got a guide to life insurance ratings agencies.)
The Better Business Bureau is a private, nonprofit organization that rates businesses’ trustworthiness. You can see their rating and any available information about outstanding complaints or other issues.
For example, Fabric has a Better Business Bureau grade of A+, the highest possible rating.
At the end of the day, you take life insurance seriously because it has the power to help financially protect your family. State departments and national organizations take it seriously, too. They work to keep insurance providers accountable so you can feel true peace of mind about your coverage.
Fabric exists to help young families master their money. Our articles abide by strict editorial standards.
Fabric by Gerber Life exists to help young families master their money. Our articles abide by strict editorial standards.
Information provided is general and educational in nature and is not intended to be, and should not be construed as, financial, legal, or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. We make no warranties with regard to the information or results obtained by its use, and disclaim any liability arising out of your use of, or reliance on, the information.
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