Regulation & credit ratings

Before you buy a life insurance policy, you owe it to yourself to conduct your own due diligence. This includes making sure the company is licensed and that it is financially solid. Don't assume that all insurers are the same. In the early 1990s, several major life insurance companies collapsed from poor financial management.

Each state government has an insurance department that regulates life insurance companies that sell policies in the state. In this respect, insurance companies are different from other financial institutions that are regulated by a federal agency.

(Since variable life insurance deals with stock and bond investments, insurers selling these policies must also be licensed with the Securities and Exchange Commission (SEC).)

You should make sure the life insurer selling you a life insurance policy is licensed in your state. For further information, visit the Web site of the National Association of Insurance Commissioners (NAIC). The NAIC maintains a directory of state insurance departments.

When you buy a life insurance policy, you want to make sure that the insurance company will be around to pay a death benefit to your beneficiary. You will also want to make sure it practices sound financial management with your premiums. To help with your due diligence, a credit rating agency can help.

A credit rating agency analyzes the financial operations of an insurance company and issues a credit rating. A credit rating is an independent assessment of the insurer's ability to pay its claims on time and meet all other financial obligations. Top-notch ratings are triple "A"- or double-"A". Ratings in the low-"B" range or lower signify deteriorating financial strength. The major credit ratings agencies include:

• A.M. Best Co: A.M. Best Co. publishes financial-strength ratings called "Best's ratings." The New Jersey-based rating service reserves its top ratings for insurance companies with a very strong ability to meet their financial obligations. Firms with a single-C+ or lower rating are considered to have marginal weak, or poor financial characteristics.
  
• Standard & Poor's: Standard & Poor's has two sets of insurer ratings: a financial-strength rating and "financial-enhancement rating." It reserves its top-notch triple-A rating for firms with extremely strong financial characteristics. Firms with a double-B or lower rating are considered to have marginal or weak financial characteristics.
  
• Fitch Ratings: Fitch Ratings publishes three sets of insurer ratings: an International Long-Term, National Long-Term, and International Short-Term Insurer Financial Strength ratings. Fitch also reserves its top-notch triple-A rating for firms with extremely strong financial characteristics. Firms with a double-B or lower rating are considered to have moderately weak or weak financial characteristics.
  
• Moody's Investors Service: Moody's also publishes financial-strength ratings of life insurance companies. Its top-tiered rating is also triple-A, which it assigns to insurers with exceptionally strong financial characteristics. It describes as questionable those insurers to which it assigns a rating of "Ba" or lower.
  

Generally, you should aim to buy a life insurance policy from an insurance company that receives a top rating over many years. It also helps to check more than one source for a credit rating.