A Look Under The Hood of Life Insurance Firms
Buying a tangible item, like an automobile, is tough enough. There are many manufacturers, and each one has several appealing models. Each model has different features that can be purchased separately or in option packages. Price comparisons between models and features are complicated by rebates, dealer discounts and special financing. Too often, I've made a buying decision on the basis of color, feel and the wonderful way a new car smells.
Buying an intangible item, like life insurance, is tougher yet. For one thing, life insurance policies don't come in Cherry Red or Continental Blue. They're not soothing to touch, and they smell like a musty attic.
But of greater concern to customers is that not only are there many insurers to choose from, but the newspaper headlines make it clear that there are major differences in insurers.
Increasingly, consumers are looking for guidance in selecting insurer. Although far from comprehensive, I've come up with basic rules that serve as a starting point.
Rule #1--Understand the Basics
Life insurance is a complex financial product, but underlying this complexity is a simple fact. The building blocks for all life insurance are (1) investment return; (2) mortality experience; and (3) expense management.
Another simple fact is that life insurance pricing reflects assumptions about these elements. Not even the smartest pricing actuary knows for sure what the financial markets will be doing in 30 years, how many new insureds will still be alive then, and what will happen to home office and field expenses in the interim.
And because life insurance pricing is based on assumptions about the future investment results, mortality and expenses, it generally contains conservative guarantees. However, to the extent that an insurance company has better than guaranteed performance, its higher investment return, lower mortality experience and improved expense management may be passed on to the policy-owner Furthermore, the anticipated better-than-guaranteed results are usually demonstrated to the prospective buyer on computer-generated sales illustrations.
This takes us to a third basic fact. A key to selecting a life insurance company with care is understanding the difference between premiums, cash values and death benefits that are guaranteed vs. premiums, cash values and death benefits that are merely anticipated.
Only when a buyer understands the difference between guaranteed and anticipated results can he make a reasonable assessment of life insurance sales illustrations.
Rule #2--Get the Facts
What it comes down to is performance. Until recently, the question about performance was whether the insurer would perform as well or better than it illustrated. In today's economic environment the question about performance takes on a more ominous tone: Will the insurer be solvent when the time comes for it to deliver on its obligations? Short of taking up actuarial science as a hobby, how does the typical consumer evaluate the likelihood that an insurer will perform as illustrated?
One way is to look at past performance. Agents should be asked to provide dividend histories of their companies. Although times change and past performance doesn't always predict future performance, a good track record suggests a corporate commitment to policy-owners that runs deeper than a desire for short-term gains.
Another way to evaluate performance is to look to the three major rating agencies: A.M. Best's, Standard & Poor’s and Moody's.
A.M. Best's publishes detailed information about the investment return the mortality experience and he expense management of most life insurers. A+ (Superior) is Best's highest rating and is assigned only to those insurers that have demonstrated the strongest ability to meet their obligations to policy-owners.
Standard & Poor's and Moody's also publish in-depth analysis of insurers. Standard & Poor's assigns its highest AAA rating only to those insurers that offer superior financial security on both an absolute and relative basis. Moody's assigns its highest rating of Aaa only to those insurers whose policy obligations carry the smallest degree of credit risk.
Rule #3--Buy From a Professional
Life insurance is like most things worth knowing about; the more you learn about it, the more you realize you don't know about it. Most consumers will find it helpful to rely on the counsel of professional insurance agents in choosing an insurer and selecting the right policy for them.
One measure of an agent's professionalism is his or her willingness and ability to answer hard questions about the difference between guaranteed and anticipated results, and to provide information about the performance of an insurer.
Another measure of an agent's professionalism is the agent's professional designations. The CLU/ChFC designations mean that the agent has completed courses and exams on such subjects as life insurance law, investments and economics. They also mean that agents have pledged to provide the same level of service to clients as they would provide to themselves under similar circumstances.
It's not my intention to make anyone an expert on life insurance. Why? I don't pretend to appreciate the difference between a carburetor and a fuel injection system. But I do know to ask about gas mileage and test drive performance. And, I know to look in Consumer Reports and Car & Driver for invoice prices and expert analysis I think I'll have more satisfied clients if they know what to look for under the hood of my product.