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How do I pick a life insurance company?
Roughly 1,000 life
insurance companies sell life insurance in the U.S., but many are
members of groups of companies and so aren’t really competitors with
each other. Having separate companies enables a group to offer its
products through separate distribution channels, to more efficiently
meet the regulatory requirements of particular states, or to achieve
other organizational goals. There are an estimated three hundred
company groups.
Moreover, not every group has a company licensed to operate in each
state. As a general rule, you should buy from a company licensed in
your state, because then can you rely on your state insurance
department to help if there’s a problem. And if the insurance company
becomes insolvent, your state’s life insurance guaranty fund will help
only policyholders of companies it has licensed. To find out which
companies are licensed in any state, contact that state’s state insurance department.
There are several other points to keep in mind when selecting a life
insurance company:
- Product – most, but not all,
companies offer a broad range of policies and features, so choose a
company that offers the product and features that meet your needs.
- Identity – life insurance
company names can be confusing, and different companies can have
similar names. Life insurance company names often use words that
suggest financial strength (such as Guaranty, Reserve, or Security),
financial sophistication (such as Bankers, Financial, or Investors),
maturity (such as First, Pioneer, or Old), dependability (such as
Assurance, Reliable, Trust), fairness (such as Beneficial, Equitable,
or Peoples), breadth of operations (such as Continental, National, or
International), government (such as American, Capital, or Republic), or
well-known and respected Americans (such as Jefferson, Franklin, or
Lincoln). Be sure you know the full name, home office location, and
affiliation (if any) of any company you are considering (for an
example, click here).
- Financial Solidity – life
insurance is a long-term arrangement. There is no guarantee for life
insurance policyholders similar to that provided for bank accounts by
the Federal Deposit Insurance Corporation (FDIC). Select a company that
is likely to be financially sound for many years, by using ratings from
independent rating agencies.
- Market ethics – some life
insurance companies subscribe to the principles and codes of conduct of
the Insurance
Marketplace Standards Association, a nonprofit organization that
promotes ethical conduct in life insurance marketing.
- Advice and service – for
many people, life insurance is a strange, complex product, so that it
helps to deal with a representative with whom you can communicate and
who is attentive to your needs. This might be connected to the
selection of a life insurance company because some agents represent
only one or a very few life insurance companies. See
How do I select a life insurance agent?
- Claims – you may want to
check a national claims database to see what complaint information it
has on a company. Also, your state insurance department will be able to
tell you if the insurance company you are considering doing business
with had many consumer complaints about its service relative to the
number of policies it sold.
- Premium and cost – The
premium is the amount you pay the company for the life insurance
contract with all of its benefits. Even for a given death benefit and
type of insurance (e.g., term life), the premium can vary widely among
companies, either because some companies’ policies have features that
others don’t, or because some charge more than others for the same
coverage. So the first step in comparing policies is to make sure you
compare similar insurance plans, based on
-Your age
-The type of policy and policy features
-The amount of insurance you are purchasing
The premium for the policy isn’t the same as the cost of the protection
portion of the policy. One policy might have a higher premium but also
offer more benefits (for example, it might pay policy dividends) than
another. Or both might promise dividends, but in different amounts at
different points in time. In each case, the higher-premium policy might
have a lower cost of protection. How can you tell what a policy’s cost
is? Companies should tell you a policy’s Net Payment Cost Index and its
Surrender Cost Index. Use the Surrender Cost Index if you’re thinking
of keeping the insurance only for a specific period of time; use the
Net Payment Cost Index if you expect to keep the policy indefinitely.
Generally, the lower the cost index, the better.
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