Part of finding the right life insurance company includes reviewing their financial standing, consumer confidence, and customer satisfaction.
Fitch Ratings is one of the three rating agencies we use to determine an insurer ’s financial health. By conducting a thorough evaluation of each company’s financial background, debt, and sensitivity to the market, Fitch determines the likelihood of an insurance company carrying out their financial obligations — in layman’s terms, pay out your policy’s death benefit to your loved ones.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
Why should you care about an insurer’s financial health?
When you’re buying life insurance, you want to be sure that you’re putting your family’s finances in good hands. A sound financial rating from your insurance company means you can be confident in their ability to pay out the life insurance funds to your beneficiaries.
What is Fitch Ratings agency?
Fitch Ratings is one of three major credit rating agencies that grade institutions based on their financial standing and the likelihood of bankruptcy. The other two top credit ratings agencies are Standard & Poor’s (S&P) and Moody’s.
They award ratings for major financial institutions, from banks, corporations, and insurance companies to “sovereigns”, or countries. As one of the most trusted rating agencies globally, their risk analysis is sought by consumers, investors, and government agencies alike.
Learn more about the best life insurance companies of 2024
Rating criteria
To determine an insurance company’s financial standing, Fitch specialists extensively analyze multiple facets of the business. The final score is representative of the business’s vulnerability to market conditions, cash reserves, and ability to recover from any financial duress.
Simply put, this determines if an insurance company can meet its policy obligations in the long run. Each criterion is weighted differently in the cumulative grade an insurance company receives.
Their key credit factors are based on the following:
Qualitative factors
Industry profile and operating environment, which assesses an insurer’s strengths and limitations.
Business profile, which is driven by an insurance company’s competitive positioning in the market, risk profile, and diversification of the business.
Ownership, which only affects the rating if the owner “exercises control” over the business.
Corporate governance and management, which can be negatively impacted by variables such as no board independence (meaning little room for oversight and accountability) or suspicious business transactions.
Quantitative factors
Capitalization and leverage, which measures an insurer’s ratio of capital-to-risk, their ratio of debt-to-capital, and their ratio of total financing and debts to reliance on funding.
Debt service capabilities and financial flexibility, which is their ability to recover from adverse financial conditions.
Financial performance and earnings, which measures how much capital an insurance company generates.
Investment and asset risk, which accounts for risks the insurance company faces from the market and liquid assets. It also reviews an insurance company’s reserves and risk mitigation practices, such as reinsurance (insurance for insurance companies).
Fitch scoring guidelines
Fitch ratings range from AAA (the insurance company poses little financial risk) to D (the insurance company has an adverse financial background and poses a lot of risk). Ratings can also receive a plus or minus.
The lower the grade for a life insurance company, the higher the likelihood that an insurance company may default and not pay out the entire life insurance benefit. An insurance company with a higher rating is more reliable when it comes to your family’s financial security.
Below you’ll find each rating and what they mean for your life insurance coverage.
Fitch grade | Grade meaning |
|---|---|
AAA | The best possible rating that can be awarded. The insurance company is in exceptionally good financial health and has little chance of being adversely impacted by an economic downturn. |
AA | The insurance company is in exceptionally good financial health and is not unlikely to be vulnerable to an economic downturn. |
A | While the insurance company is in relatively good financial health, it may be vulnerable to negative market conditions. |
BBB | Though the insurance company is in relatively good financial health, certain economic conditions can harm their ability to fulfill policy obligations. However, there are adequate safeguards in place. |
BB | An indication that the insurance company is susceptible to an economic downturn. |
B | This rating indicates above-average vulnerability to unfavorable economic conditions, meaning there is a chance they may not be able to fulfill financial commitments. |
CCC | There is a high risk associated with this insurance company and a strong likelihood that they cannot fulfill financial commitments. |
CC | Inability to meet financial commitments is probable |
C | The insurance company is near default and is unlikely to fulfill financial commitments. |
RD | Short for restricted default, this means the insurance company has defaulted but has not filed for bankruptcy or submitted to any other formal procedure. |
D | Short for default, this means the insurance company has filed for bankruptcy, liquidation, or another formal procedure. |
How Policygenius uses Fitch Ratings
Policygenius uses Fitch Ratings, alongside other major third-party rating agencies, to conduct comprehensive reviews of the best life insurance companies.
Fitch Ratings are factored into our score of confidence for each insurer, which is their ability to eventually pay out the life insurance death benefit. This information, coupled with customer satisfaction, cost, and policy details, determine our final company rating and review. You can read more about our methodology.
