Jim Lorenzen, CFP®, AIF®
Don’t believe beautiful illustrations. They’re based on assumptions that can change. Unless you know the probability of success in advance – not an easy thing to do – you may be buying a “pig-in-a-polk”, as we used say when I was in college back in Virginia.
Example: Before Executive Life of New York went under, they had over 50% of their portfolio invested in less than investment grade ‘junk’ bonds, despite the fact that in June 1987, the New York legislature had mandated that insurance companies licensed to business in that state were to limit their general portfolios to no more than a 20% allocation to such bonds. Remember, there are no guarantees; there are only guarantors. [Source: The New Insurance Investment Advisor, Ben G. Baldwin, McGraw-Hill 2002, p. 37.]. Is your insurance agent a qualified investment advisor who knows what to look for “under the hood”?
Most of the well-known rating agencies we’re familiar with are actually paid by the insurance companies they rate.
Yes, you should read that again.
Little wonder many insurance companies that failed actually had good ratings when they went under. My personal favorite rating agency is Weiss. They receive no money from the insurance companies they rate – they’re paid by customers who access the ratings. Their ratings are called ‘safety ratings’ and they seem to be a little more stringent. For example, according to the September 2002 Insurance Forum, of 1221 life and health companies rated by Weiss, only 3.9% of companies made it into the ‘A’ category. Compare that with the 54.9% rated ‘A’ by Standard and Poor’s. At Moody’s, 90% of their list made it to ‘A’ that year. A.M. Best gave ‘A’ to 56.3% of the companies they rated.
The takeaway: You may want to be sure your agent is not only independent, but understands whether and how life insurance fits into your overall financial plan. Your agent/advisor should also khow the difference between a “highly-rated” company and an “investment grade” company.
Thought you might be interested.