Read this if you own an annuity or life insurance policy. Read this even if you don’t, because you need to know about the ways you can check up on an insurance company’s rating.
Have insurance companies been exempt from federal bailouts and rescues? No. These are rough times for insurers too. So how can you learn about any risks to a) your policy, b) your annuity, or c) the insurer behind it? And how can you identify the insurance companies that have weathered the recession well?
Comdex rankings. You can’t judge a book by its cover, but you can judge an insurance company by its Comdex ranking. This is a useful place to start.
As the name implies, the Comdex is a composite index: an average percentile ranking of credit ratings provided for life and health insurance companies by firms such as Moody’s Investors Service, A.M. Best Company and Standard & Poor’s Corporation.
The Comdex ranks insurers using a weighted average on a scale of 1 to 100, 100 being best. If an insurer has a Comdex rating of 85, for example, that means the Comdex has ranked its strength and solvency as superior to 85% of the insurance companies in the index.
If you want to see the actual ranking/opinion of Moody’s or Best or another credit firm rather than an average, visit iii.org/individuals/life/buying/strength/ – this is the website of the Insurance Information Institute, a longstanding information source for media and the public about the insurance industry. Or link to your state insurance department via naic.org.
What if the insurance company doesn’t have such a good ranking? Some small and mid-sized insurance firms will have lower safety rankings. That might make you think twice. If you hear that an insurance company has been downgraded three or four times, you want to keep an eye on it. In this financial climate, buying a new annuity from a top-rated company is especially wise.
There are state guaranty funds in case insurance companies fail. While annuities aren’t FDIC-insured, you may have up to $100,000 of coverage by your state’s guaranty association in case of failure. We’re talking cash value; death benefits are often protected by states to a limit of $300,000.
State guaranty funds are designed to protect death benefits, guaranteed minimums, and other guarantees in an annuity contract. They usually don’t cover losses incurred by investment sub-accounts.
What about share prices? These are not necessarily indicative of an insurance company’s financial health. Some of those stock prices have dipped as a consequence of attempts to raise capital. While such efforts may weaken existing shares of a company, fresh capital improves the insurer’s capability to pay claims.
If an insurer is in real trouble, state insurance departments will usually monitor the company’s health and try to stave off failure by helping them find more capital or arranging a sale to a healthier insurance company that can fulfill annuity payments and the guarantees that come with long term care insurance, life and disability insurance, and living benefit riders.
When new companies take over annuities, the annuity owners make payments to or collect payouts from the new insurer. The terms of the annuity usually aren’t affected as a result.
Surrender? Not if you can help it. If you surrender an annuity, you might end up with less than you would get if the insurer had failed. Surrender charges can be sizable, while state guaranty funds commonly offer protection up to $100,000 or $300,000.3
If your annuity provider appears to be on shaky ground and the surrender charge period is over or just about over for the annuity, you could consider a 1035 exchange – a tax-free exchange from your current annuity contract into a contract with new terms, which could be provided to you by a higher-rated insurance firm.