Just as the bonds issued by companies and municipalities are rated, so are insurers. But understanding these "financial strength" ratings is not easy: An A from one may not mean the same thing as an A from another (table).
The older rating agencies are A.M. Best (www.ambest.com, 908 439-2200), Fitch Ratings, (www.fitchratings.com, 800 893-4824) Moody's Investor Service (www.moodys.com, 212 553-0377), and Standard & Poor's (www.standardandpoors.com, 212 438-2400).
Insurers pay them for the grades, in the same way corporations and municipalities pay for theirs. Weiss Ratings (www.weissratings.com, 800 289-9222), launched in 1987, doesn't charge insurers but sells its reports to insurance agents, financial advisers, and consumers.
The key criteria that go into the analysis of a company are its business position, or competitive strength; its operating performance, or ability to drive sales and earnings; and its capitalization, or cash reserves, which is used to pay the claims.
At A.M. Best, which rates more insurers than any other, top ratings are A++ and A+. "Most likely these companies have the best reputation and have a competitive edge over others," says Michael Cohen, vice-president for life/health ratings at A.M. Best.
Watch out for B ratings, which on the surface don't sound that bad. They're fine at Weiss but can be marginal or even signify serious financial vulnerability at the other agencies.
It's advisable to buy policies from insurers that are rated A+ by A.M. Best or its equivalent. "Often, the most competitive prices are from companies that are the highest-rated, so why settle for less?" says Byron Udell, CEO of Accuquote.com, a life insurance brokerage in Northbrook, Ill. If you've already bought a permanent life policy from a company with a slightly lower A rating, don't cash it in. But you do want to keep an eye on the insurer to make sure its rating hasn't dropped much lower.
By Pallavi Gogoi