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Life Insurance Companies

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Selecting a Company

A life insurance company needs to be financially strong when you buy a policy from it. That is no guarantee that it will remain that way, but if it is not in good shape when you buy, you are taking a risk right from the start.

However, even if the company has the best rating possible at the time of purchase of a policy, things could go downhill after that and the security of it's superior rating may disappear. It could even be put out of business by the Department of Insurance because of a developing weak financial condition, yet it started out looking so good.

This sort of dramatic deterioration over a period of time has happened before and can be expected to happen again. Not often, but it happens. So what's a consumer to do?

Fortunately, there are some defenses built into the system which have historically worked very well for life insurance policyholders.

Insurance companies must report their financial condition to a regulatory authority on a regular basis. This is usually sufficient for the regulator to intervene, and take control of the company if necessary, before it's financial condition get's too bad.

If the company cannot be rehabilitated, it is either sold or dissolved. A sale is preferable so that the same or similar coverage can be maintained for each policyholder. The policyholders may well notice no substantial change except the change of name of the insuring company.

How often do you hear of death claims not being paid because of the insolvency of a life insurance company? Not only is the industry highly regulated, but there are also guaranty funds which pay all or part of claims if the event that the insurer must be liquidated because it has deteriorated to the point that no buyer can be found.

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All the companies in our quoting system are sufficiently strong financially so you don't have to worry about their current financial condition at the time of quoting. It's as safe as it can be to buy from any one of these companies. However, anything could happen in the future, so there is no guarantee that any particular company will stay that way, no matter how large it may be. Remember AIG?

Because of the high level of regulation, you can buy with confidence. Life insurance is a very reliable product even if there will always be a few companies who get into trouble.

Regulation of Companies

The first responsibility of a life insurance insurer is to stay in business. Because their economic function is so important, they are regulated by a state government agency who monitors their financial condition. All major life insurance companies are also rated for financial strength by private rating companies such as AM Best. The AM Best ratings are listed in the last column when you get online quotes.

All insurance regulation is done state by state, and in most states is known as the Department of Insurance or Division of Insurance. Relative to state regulation, there is little federal regulation directed specifically at the insurance industry. Funding is provided by licensing fees, not by taxes.

The State insurance regulator does not determine what the premium rates should be. However, in most states, each insurer must file its proposed rates for the insurance it sells with the state insurance regulator and must be able to justify the rates with actuarial figures.

The insurance company must demonstrate that the rates are reasonable considering the cost of claims and company operations, and an allowance for reasonable profit if the insurer is a for-profit company. The rates should not be too high as to be excessive or too low as to jeopardize the company's financial integrity.

Companies must also file financial reports with the state insurance regulator to demonstrate financial stability. If any life insurance company does not meet the minimum requirements for financial strength, it may be put out of business. Usually, an attempt is made to have the obligations of the life insurance company taken over by another insurer so as protect the public by enabling continuity of policies.

Most states have two guaranty associations. One association is for health, life, and annuities etc., and the other is for property, casualty, and personal lines such as auto and home insurance.

All states have a guarenty assocation for life insurance and all life insurance companies doing business in the state must join the association. The association is overseen by the state insurance regulatory authority and funded by the insurance company members.

The combination of regulation and the guaranty asociations means that life insurance is a reliable financial product.

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