Are Insurance Companies Safe? Ratings, Risks, & Guaranty Funds
Will your insurance company be there for you?
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Buying a whole life policy or annuity isn’t just about comparing premiums and benefits. It’s also about ensuring the insurer can deliver on its promises. If the company runs into financial trouble, your payout could be delayed, reduced, or even put at risk.
You can reduce that risk by checking the insurer’s ratings for financial strength, reviewing its record with the National Association of Insurance Commissioners (NAIC), and confirming it participates in your state’s guaranty fund. Taking these steps before you sign an insurance policy or annuity contract helps to ensure your coverage stays in force and your investment is protected.
Key Points
- Ratings agencies evaluate the financial strength of insurance companies and their ability to pay claims.
- If a licensed insurer becomes insolvent, your state’s guaranty fund steps in to pay beneficiaries, up to state coverage limits.
- Before buying a policy or annuity, review the insurer’s ratings and other financial information to protect your investment.
Are insurance companies safe?
When you buy life insurance or an annuity, you’re making a long-term bet that the company you’re purchasing it from will still be around and financially sound when it’s time to pay. Most insurers deliver on that promise, but a few get into financial trouble, putting your benefits or your beneficiaries’ payments at risk.
That risk is avoidable if you take time to check an insurer’s stability before you buy. Start by reviewing ratings that measure a company’s financial strength. Confirm that it’s licensed in your state and participates in your state’s guaranty fund, which steps in if the company fails. And use the NAIC’s website to review an insurer’s financial records and complaint history. A little homework now can help you avoid problems later.
Major insurance company rating agencies
Several independent agencies assess the financial strength of insurance companies, each using its own scale and methodology. Some focus solely on the insurance industry, while others cover a broader range of financial products. Look for companies rated in the A range or higher by at least one agency, and consider checking several rating sources to get a more comprehensive picture.
Strong ratings at a glance
For maximum safety, look for insurers with the highest rating from at least one agency. The first rating shown for each agency is its top score; the others are considered strong:
- A.M. Best: A++ (best), also A+, A, A–
- Fitch Ratings: AAA (best), also AA+, AA, AA–, A+, A, A–
- Kroll Bond Rating Agency: AAA (best), also AA+, AA, AA–, A+, A, A–
- Moody’s Investors Service: Aaa (best), also Aa1, Aa2, Aa3, A1, A2, A3
- S&P Global Ratings: AAA (best), also AA+, AA, AA–, A+, A, A–
- Weiss Ratings: A+ (best), also A, A–
Higher ratings indicate stronger financial health. Only the first rating listed for each agency is the absolute best score; the others are solid, but one or more steps lower.
A.M. Best
Focuses exclusively on the insurance industry. Ratings range from A++ (superior) to D (poor); A– and higher is generally considered strong.
Fitch Ratings
Rates insurers and many other types of companies. Uses a letter scale from AAA (exceptionally strong) to D (default).
Kroll Bond Rating Agency (KBRA)
Covers insurers along with other sectors. Ratings run from AAA (extremely strong) to D (default) or R (regulatory supervision).
Moody’s Investors Service
Rates insurers, corporations, and governments. Uses a letter-and-number scale from Aaa (exceptional) to C (lowest). Aaa to A3 is generally considered strong.
Standard & Poor’s Global Ratings (S&P)
Rates a broad range of financial institutions, including insurers. Grades run from AAA (extremely strong) to D (default). Ratings of A– or higher indicate a strong capacity to meet obligations.
Weiss Ratings
Covers insurers, banks, and other financial companies. Uses school-style grades from A (excellent) to F (failed), with plus and minus signs indicating upper or lower thirds of a grade.
How state insurance guaranty funds protect you
Every state has an insurance guaranty fund, and licensed life insurers are required to contribute to it. (Some states maintain separate funds for life insurance and property and casualty insurance.) If a company becomes insolvent, the fund steps in to cover all or part of the insurer’s obligations, subject to state coverage limits. To ensure you’re protected, confirm your insurer is licensed in your state and contributes to the guaranty fund. If the company fails, the fund may cover some or all of what you are owed on an annuity, and your beneficiaries can still receive a life insurance payout.
Model legislation from the NAIC
The National Association of Insurance Commissioners (NAIC) develops model laws and regulations to promote consistent consumer protections across states. Many insurers adopt these models in full or with minor changes, resulting in similar protections for insurance policyholders, although details may vary.
Where to check your state’s guaranty fund structure
How to check an insurance company’s safety with NAIC
NAIC monitors insurers and offers tools for reviewing their financial strength and consumer track record. Its consumer insurance search includes complaint histories, licensing information, and financial overviews for life insurance companies.
Searching this database can reveal whether other consumers have filed complaints and provide insight into how an insurer manages its finances.
The bottom line
Insurance companies can fail, but you can protect your benefits by taking a few precautions. Choose an insurer that participates in your state’s guaranty fund, and review its ratings from agencies that evaluate financial strength. Check licensing and complaint records through the NAIC, and verify that the company’s financial position appears stable.
Although no step can guarantee your insurer will always be able to meet its obligations, these measures greatly improve the chances that you or your beneficiaries will receive a life insurance payout or your annuity payments will arrive as promised.
References
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