You have decided to take the necessary steps to protect what matters most, but you don't know where to start. You know that you need to make sure that the life insurance provider is financially secure enough to pay your claims in the event that the inevitable happens. So, how do you choose an insurance provider to protect you and your family?
The first thing you should do is to check the insurance company’s history and reputation. You may want to ask yourself how long has the company been in business, It is important to know whether the company that is protecting you can continually stand the test of time.
You should also consider what type of insurance company and ownership structure does the provider have. What is the difference between stock vs mutual insurance companies? A stock insurance company is a corporation that is owned by its stockholders. Because of this business structure, stock insurance companies do not share the company's profits (or losses) with its policyholders. While mutual insurance companies is a business structure that is owned by its policyholders, who have a right to vote on the board of directors. The companies managed assets insurance reserves, surplus, contingency funds, dividends held for the benefit of its policyholders and their beneficiaries (Rosen, 2019). Although it is not guaranteed, the board of directors along with the asset managers will determine and declare whether dividends can be paid out to its policyholders, When deciding on which business structure you are comfortable with, you must consider the company's chances of insolvency. Do you want a company covered by state guaranty funds, or do you want a company that is focused on serving its policyholders?
When choosing an insurance provider, you should be determining the insurance company’s financial strength and credit rating. Think about a company's net income, combined ratio, and policyholder surplus. An insurance company's net income measures whether they have profits or did they incur a loss. The combined ratio will determine whether the firm is making a profit or paying out more in claims. A combined ratio lower than a 100% means the company's underwriters are evaluating cases presented appropriately and making a profit while a ratio above a 100% means the company is paying out more in claims, and it is making in premiums, meaning they are losing money. A policyholder surplus provides a measure of the insurance company's net worth. You can use the company's investor relations website to view their financial strength, besides using independent agencies such as A.M. Best, or Moody's. The financial strength and credit ratings of a company are very important measures because the insured depends on their chosen companies to pay for their suffered and incurred loss.
Beyond a company's financial strength, credit ratings, and standing the test of time. The company's reputation and consumer ratings are also a vital measure that needs attention. What are the company's philanthropic efforts to give back to the community? Does the insurance company have reported complaints? Some states have specific information on where to file complaints, but you can also do the NAIC's Consumer Information Source. You can alternatively look for reviews from consumerreports.org, or bbb.org to check if there are open complaints about the agent or broker you are working with.
References Investopedia. (2019). Mutual vs. Stock Insurance Companies: What's the Difference?. Retrieved Jan 2020 from: https://www.investopedia.com/articles/personal-finance/011916/mutual-vs-publically-traded-insurance-companies.asp.
