How to Choose a Disability Insurance Company
by Bill Olmsted
If you’re searching for a disability insurance policy, there are several factors you need to consider. Is the policy right for you and your occupation? Which agent are you going to use? Which insurance carrier do you feel most comfortable giving your money to?
All of these are important considerations which need to be addressed before you apply for a policy. While we will touch on the importance of choosing the best policy, and an experienced agent, the main focus will be on choosing the right disability insurance company from a financial strength standpoint. After all, a policy is a promise, and that promise is only as strong as the company behind it.
When searching for a policy, the first thing most people look at is the amount of coverage they can buy, and the premium for this policy. This is the wrong place to start. This is not a commodity, and each policy is different. Two policies may offer the same amount of coverage, but one may cost less than the other for any number of important reasons.
If one policy costs 20% less than the other, but doesn’t protect you in your own occupation, doesn’t have a cost of living adjustment, or doesn’t cover partial disabilities, is the savings worth it? Unfortunately, most people’s shopping experience stops once they find the policy with the cheapest premium.
An experienced agent who specializes in disability insurance can make sure you’re getting the best value, not just the cheapest rate. An experienced agent is very important when assessing policies. Too often, consumers try and become an expert on the subject of disability insurance, and they invariably overlook important provisions, which may be relevant to their situation. Many times, these provisions are not explained in detail in the quotes that a consumer will receive. An experienced agent who has read the specimen contracts of the insurance carriers would know which companies offer provisions that may be important to you, and which do not.
This agent is also very important during the underwriting process, where frequent communication with the underwriter is necessary. It stands to reason that someone who specializes in this area will know how to better navigate the underwriting process, and get you the best offer, than someone who only writes a few policies a year.
It is important to find the best policy for your situation, and work with an experienced agent to get it, but the policy must be backed by an insurance company with very strong financials. The policy you’re buying is a promise – a promise to pay a benefit should you be disabled. That promise is only as strong as the insurance company making it. Furthermore, this promise is expected to be there many years into the future. That means that not only must the insurance company be able to honor it today, it must have the long term financial viability to honor it many years, perhaps decades, into the future. When reviewing an insurance company, it is important to assess the following areas:
1. Financial Ratings – Several factors are evaluated for each insurance company by independent rating services. Their ratings are widely relied upon by individuals and businesses as essential indicators of financial strength and stability of insurance companies.
2. Capitalization Ratio – This is a measure of financial strength and an indicator of a company’s ability to ride out uncertain economic times.
3. Net Investment Yield – The yield represents the net earned rate on all invested assets, excluding realized and unrealized gains and losses.
4. Company Philosophy – It is important to understand the values and investing philosophy of the insurance company so that you are comfortable that it can withstand market fluctuations over many years you will own your policy.
Financial Ratings – Where to Start
There are four major independent rating organizations that rate the financial health of insurance companies. These are AM Best, Standard & Poor’s, Moody’s, and Fitch. These four organizations are independent, and serve the public by assessing many different types of financial facts about insurance companies. They then distill this information down to a rating which, can serve as a great place to start the evaluation process.
Unfortunately, each organization uses different rating designations, so it’s not easy to compare one against the other. For example, A.M. Best’s top rating may be A++, while Fitch’s is AAA. To make things simpler, a table called the Comdex Rankings is a composite of all ratings that a carrier has received. Comdex percentile ranks the companies on a scale of 1 to 100 (with 100 being the best).
Experts who write about the insurance industry will tell you that a Comdex of 95 or higher is considered an “extremely safe” company; 90 represents a “safe” company; and a ranking of 85 indicates a “reasonably safe” company.
Comdex Rankings as of July 20171
|Insurance Company||A.M. Best||S&P||Moody's||Fitch||Comdex|
|Northwestern Mutual Life Insurance Company||A++||AA+||Aaa||AAA||100|
|Berkshire Life Insurance Company of America||A++||AA+||N/A||AA+||99|
|The Guardian Life Insurance Company of America||A++||AA+||Aa2||AA+||98|
|Massachusetts Mutual Life Insurance Company||A++||AA+||Aa2||AA+||98|
|Metropolitan Life Insurance Company||A+||AA-||Aa3||AA-||94|
|Principal Life Insurance Company||A+||A+||A1||AA-||90|
|Standard Life Insurance Company||A||A+||A2||A||79|
|Source: Vital Signs, July 1, 2017. Ratings are as of July 2017 and are subject to change without notice.|
Please consult with your financial advisor for complete details concerning the ratings above. Some of the ratings reflect the performance of the parent company and/or other entities related to the issuing insurer.
It’s always been important to understand the business philosophy and financial strength of any company you’re investing in. Buying an insurance policy should be no different. Although the rating organizations do a good job of evaluating carriers, for those that want to go a bit deeper and really understand the ability of the insurance company to follow through on their financial promise, there are a couple of other areas one can evaluate.
The capitalization ratio is a measure of financial strength of an insurance company that most consumers never evaluate, but should. It shows the company’s capital as a percentage of net admitted assets. Most of the liabilities of any insurance company are composed of the reserves set aside to pay future claims. Capital represents the amount of assets in excess of those liabilities, and a high capitalization ratio indicates a greater proportion of these excess assets.
A high capitalization ratio is an indicator of capital on hand to pay future claims, and the health of the insurance carrier, and should be considered when evaluating financial strength. The net investment yield represents the net earned rate on all invested assets, excluding realized and unrealized gains and losses.
Finally, company values are an important consideration when evaluating a disability or life insurance company. There are differences between stock and mutual life insurance companies, and these differences could be important over the long term. Unlike publicly held companies, mutual life insurance companies are owned by their policy owners. Because of this, their investment strategies can be very different, and often times better suited to withstanding long term market fluctuations.
Buying a disability insurance policy is a significant purchase for many people. Not only is the premium often times significant, what is being protected is significant – their income. You want to make sure you are not only getting the best insurance policy possible for your situation, you are also getting the most financially stable insurance company possible.
What good is a great policy if the insurance company behind it can’t pay the claim? Use an experienced agent to measure and evaluate the top carriers and their contracts, and you will have a much better experience should you have to file a claim.