How Important is Credit Rating of a Life Insurance Company

Life insurance companies have credit ratings of their own, much like how we all have personal credit ratings. These credit ratings can be very important when it comes to gauging the quality of service that you will receive. These credit ratings indicate how financially stable the company is. For instance, if the life insurance company is capable of honoring their financial obligations with customers, they will be given a good rating. If the life insurance company is not capable of honoring all of their commitments with their customers, they will be given a poor rating.  Most websites that provide whole and term life insurance quotes provide the insurance company rating next to the quote.

How do life insurance companies receive their rating?

A life insurance company is given a positive rating if they have the “claims paying ability” to make good on all of their financial obligations with customers. Essentially, the credit rating is based off their ability to fulfill all of their payment obligations with their life insurance customers. Auditors are in charge of providing these ratings and they will use financial documents released by the insurance companies to reach their conclusion. Ratings will also be given to the companies based on whether they have short-term or long-term ability to pay back their customers.

What does an insurance company rating actually mean?

In total, there are thousands of insurance companies that sell annuities. As a consumer, you need quick access to credit ratings so that you can measure the financial stability of their business. Letter grades are generally assigned to each life insurance company. Just as in the education system, a ranking of an A or B is considered investment grade, meaning that the insurance company is very likely to pay the entire annuity. This is very important to retirees because you are more likely to deposit a large sum of money and it’s important to know that the insurance company will remain in business for the entire period of your contract. As a senior citizen, you should use these ratings to compare the financial stability of these companies and go with a business that is rated highly.

Short-term credit ratings are generally good for a year, while long-term credit ratings last for substantially longer. There are a total of five credit rating systems that are used for life insurance companies and all of them are similar to one another. While different letters are symbols are used, they all essentially mean the same things.

How does a credit rating impact annuities?

Short-term and long-term credit ratings can impact annuities. For instance, a short-term annuity rating is going to impact the life insurance company immediately. This could be market conditions, catastrophes, financial losses within the business, or anything that can lead to immediate insolvency. If the short-term credit rating of a business is very poor, this could indicate some type of problem or challenge that the company is facing. Long-term credit ratings are going to refer to the company’s overall financial stability and how they have performed in the past and are expected to perform in the coming years.