Whether you are purchasing term insurance or permanent life, one of the most important issues to consider is the financial health of the company that’s providing the insurance. After all, you want to make sure the company will still be in business when your beneficiaries need that payoff. To check the financial health of an insurer, you should turn to one or more of the companies that make a business of analyzing players in the insurance industry. There are about a half dozen such rating services, with the best-known including Standard and Poor’s, A.M. Best, Moody’s, and Duff and Phelps
Each of these services grades the life insurers on financial strength, using letter grades to indicate how secure they consider the company. The actual grades vary by rating company. S&P uses AAA as its highest, for example, and Best uses A++.
Insurance Company Rating Categories indicates the rating service’s opinion of an insurer’s ability to meet its obligations to policyholders, based on the insurer’s reported financial performance over several years.
Along with financial health, you want to choose a company that is responsive to its policyholders. That’s why it is a good idea to check with your state’s insurance regulating body to make sure there are no serious complaints against any of the companies you are considering.
Another factor that can influence which policy to choose is the availability of riders that you want to purchase. With a term policy, for example, you might want to make sure the policy is guaranteed renewable, so that you could continue to have insurance even if your health deteriorates and other companies might consider you uninsurable. Perhaps you would want a convertible policy, which allows you to switch from term insurance to whole life with no questions asked, another way to guarantee that you can purchase insurance even if your health declines.
When deciding among permanent life policies, you should be interested not only in the death benefit, but in the potential growth of the cash value that these kinds of policies offer. Because these policies are more complex than term policies, you may have to dig a little deeper to make your comparison.
For each policy, your agent will present a number of illustrations showing how the cash value might grow, based on various assumptions about fund returns, fees and other factors. Make sure the assumptions used in the examples are based on the company’s recent experience. Find out which figures are guaranteed. Go with the most conservative estimates — compare policies based on the assumption that they will earn the lowest return presented and you will incur the highest charges presented.
When you are buying a variable or universal life insurance policy, another issue to consider is what funds are offered. In these kinds of policies, you direct where you want your investment to go. Generally, the insurer will offer a range of investments, from safe, fixed-income funds to stock and high-yield bond funds which offer the potential for more income but which come with a higher risk.
Fees can be another concern for permanent life policies, especially if you are planning on tapping into that cash value. To fairly compare policies, take a look at fees, including management fees and penalties that could eat up your cash value if you decide to surrender the policy.
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