First and foremost, you want the company to be around when (with whole life) or if (with term) there is a claim. Obviously there are no guarantees that even a well-run company today will still be around 10, 20, 50 or even 75 years hence. But with a little due diligence, you can at least select a company that will likely be around when you need it.
The company’s ratings are the logical place to start, although after the rating agencies abysmal performance in the sub-prime debacle, it would be perfectly understandable if even the best ratings wouldn’t give you a tremendous degree of confidence. Something to make you feel a little better in that regard is that the rating agencies appear to understand insurance companies, while it is clear (at least to me) that they had no idea of what collateralized debt obligations were or how they worked.
The major ratings companies are A.M. Best, Standard & Poor’s, Moody’s, and Fitch, and they all receive compensation from the companies they rate. Weiss and thestreet.com, while smaller and less known than the “big four” (apologies to my accounting brethren), receive no payment from the insurers they rate.
So to answer the essay’s title question, you should look for a company that has strong ratings across the board, but if you’re contemplating a permanent product, you shouldn’t stop there. Ask the person you’re dealing with to provide you with a Vital Signs report for the company you’re considering. In addition to the ratings, it also provides a significant amount of relevant financial data.
The two broad categories of insurance companies are stock and mutual. A stock company has shareholders, while a mutual company is owned by its policyholders. When life insurance companies came on the American scene in the mid to late nineteenth century, most of them took the mutual form of ownership. Today, the major remaining mutual companies are Guardian, Mass Mutual, New York Life, and Northwestern Mutual, and all are highly rated across the board.
It is my personal and professional opinion that whole life policies should be procured from a mutual company. One reason is that a mutual company’s management does not have to be concerned with next quarter’s earnings or the price of the stock, and thus are able to make decisions based on a longer term view. Another is that the company’s policyholders share in the company’s surplus via dividends, which, while not guaranteed, can increase the value of the policy.
Because of their much shorter time frame, term insurance policies can appropriately be procured from stock companies, unless you’re planning to convert them to a permanent product at some point in the future.
To summarize, for term policies, look for a company all of the rating companies look favorably on, and look to the major mutual companies for your whole life needs.