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Life Insurance 101

What You Should Know About Life Insurance Ratings Agencies

By Sarah Li Cain Mar 10, 2020

In this article

A.M. Best

Fitch

Moody’s 

Standard & Poor’s

How Can I Use Rating Agencies to Find The Right Coverage?

Shopping around for life insurance?

Aside from thinking about how much life insurance you need and whether term life insurance is right for you, another thing to look for is the insurer’s reputation. 

Good news: Reputable ratings agencies do the hard work of analyzing whether an insurer has the financial ability to pay out your policy. These agencies, in other words, can show you whether the issuer of your policy is legit. Plus, there are regulatory structures in place to help safeguard your life insurance policy.

If you think about it, scouring ratings is probably something you already do regularly. You may have looked on websites like Edmunds before buying a new car, or read a Sephora review before plopping down $20 for lipstick. 

When it comes to life insurance, third-party agencies dig deep to evaluate carriers’ financial strength. That includes looking at how well a company is doing in terms of its funding, management of assets and how much risk it might carry. 

“Insurance companies are mandated by law to set aside cash reserves for the coverage they provide,” says Walter Bowen, a managing partner at Modern Woodmen of America, an organization that helps provide life insurance and retirement planning services. “Ratings help to show whether a company is financially sound because a even if a company has been around a long time, it doesn’t really mean much if you can get a payout.”

Although each rating agency uses different formulas to analyze its findings, these ratings can be a key way to compare carriers.

Ratings aren’t a guarantee of financial strength, but they can be an important indicator. 

A.M. Best

A.M. Best is a global credit rating agency; it’s been around since 1899, making it one of the oldest rating agencies. One of the reasons A.M. Best is so well known that it offered the first reports of fire insurance losses attributed to the 1906 San Francisco earthquake and fire.

While there are several other independent rating agencies out there, A.M. Best is one of the most touted and respected in the life insurance industry. It stands out not only for its longevity but for its specialization: It is the only ratings agency that solely rates insurance.

A.M. Best looks at an insurance company’s financial strength in order to assign credit ratings, much like your credit score. These financial strength ratings represent a company’s ability to meet their contractual obligations to the people they insure. It takes into account factors such as enterprise risk management, financial performance, operating performance and company profile. 

“Since the actual payout of a life insurance policy may occur far in the future, credit agency ratings help a customer determine whether it’s likely the company will be able to make good on its contract,” says Patrick Kelley, a licensed life insurance and annuity agent with Symmetry Financial Group. “Obviously, the higher the rating, the better.” 

A.M. Best ratings range from D (“Poor”) to A++ (“Superior”). 

Full disclosure: Fabric offers term life insurance policies that are backed by Vantis Life, a Penn Mutual company. A.M. Best has given Vantis Life a score of A+ (“Superior”).

Fitch

Founded in 1913, Fitch operates in more than 30 countries and is considered a global leader in financial information services. The rating agency does a full analysis of a company’s credit profile and updates its ratings each year.

Factors that Fitch looks at when evaluating companies include financial earnings and performance, reserve capacity and catastrophe risk. The two categories of ratings are investment and non-investment grade—the former being companies that are more stable, the latter being companies that are more prone to changes in the economy.

Granted, Fitch doesn’t necessarily evaluate companies as insurers. Rather, it looks specifically at a company’s credit rating—is it able to meet its financial obligations (such as repayment of insurance claims)? Still, the higher the rating, the more likely the company has enough cash reserves to pay out your claim. 

Ratings for investment grade companies range from BBB- to AAA and ones for non-investment grade companies range from D to BB+.

Moody’s 

In 1900, John Moody launched his paper publication Moody’s Manual of Industrial and Miscellaneous Securities. Initially the publication provided information on various stocks and bonds but after the crash the company decided to widen its coverage, assessing the creditworthiness of corporations and government entities. 

According to Moody’s, their rating system looks at insurance companies in terms of whether an insurance company can repay a policyholder's claims in a timely manner.

It can seem a bit confusing to navigate Moody’s rating system since it uses both letters and numbers. Ranging from C to Aaa, the important thing to note is that the more A’s you see, the better the rating. There are also numbers that can indicate its ranking.

Here are the rankings from the highest to lowest:

  • Aaa

  • Aa1 

  • Aa2 

  • Aa3 

  • A1

  •  A2 

  • A3 

  • Baa1

  • Baa2

  • Baa3 

  • Ba1 

  • Ba2 

  • Ba3

  • B1 

  • B2 

  • B3 

  • Caa1 

  • Caa2 

  • Caa3 

  • Ca 

  • C

Standard & Poor’s

Founded by a father and son duo in 1860, Standard & Poor’s operates in 28 countries and boasts over one million ratings assigned to various organizations. The company started as the Standard Statistics Co. and merged with another company, Poor’s Publishing in 1941.

Like most of the other ratings agencies, Standard & Poor’s rates a company’s creditworthiness (not specifically its status as an insurer, since these ratings are for all sorts of companies) by using letter grades.

It ranges from D to AAA, with D being the lowest. Keep in mind that you could see up to three letters. The more there are, the higher the ranking. You might also see a plus or minus sign, which can increase or decrease the relative ranking.

How Can I Use Rating Agencies to Find The Right Coverage?

Searching ratings through A.M. Best can provide a strong indicator of a life insurance carrier’s strength, which is important while you’re shopping around. You might also check other places like Trustpilot to find testimonials from actual customers. 

“Since so many people’s retirement and estate plans hinge on life insurance and its unique benefits such as probate avoidance and tax advantages, it’s critically important to choose an insurance carrier that is likely to be around and able to fulfill its obligations when the time comes,” says Kelley.

Finding the right coverage doesn't have to be hard. You’ll just want to make sure that whichever policy you choose, your life insurance company will do what it promises. 

That way, you can feel good knowing that your money is going to a good cause: creating a safety net for your loved ones.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

This material is designed to provide general information on the subjects covered. It is not, however, intended to provide specific financial advice or to serve as the basis for any decisions. Fabric Insurance Agency, LLC offers a mobile experience for people on-the-go who want a easy and fast way to purchase life insurance.


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Written by

Sarah Li Cain

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Accidental Death Insurance policies (Form VL-ADH1 with state variations where applicable) and Term Life Insurance policies (Form ICC16-VLT, ICC19-VLT2, and CMP 0501 with state variations where applicable) are issued by Vantis Life Insurance Company (Vantis Life), Windsor, CT (all states except NY), and by The Penn Insurance and Annuity Company of New York (NY only). Coverage may not be available in all states. Issuance of coverage for Term Life Insurance is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Policy obligations are the sole responsibility of Vantis Life.

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