Term Insurance Ratings Explained

Term insurance ratings are determined by credit rating agencies. The largest credit rating agencies in the United States are A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s. These four agencies rate the overall financial stability and creditworthiness of term life insurance companies. Financial soundness is based on several factors. However, two of the most crucial are the company’s ability to meet all future financial obligations and its ability to manage current risk in the form of its underwriting and actuarial policies.

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Who Awards Term insurance Ratings?

A.M. Best, Fitch, Moody’s Investors Services and Standard and Poor’s each use their own proprietary formula to rate term life insurance companies. Each also issues its own definition of a top-tier credit rating. For example, the highest rating issued by A.M. Best is “A++, Superior” while the highest possible rating issued by Standard and Poor’s is “AAA, Extremely Strong”.

How can a term life insurance policyholder compare the ratings? The main goal should be to understand what the top credit rating issued by each agency means:

A.M. Best

The best credit rating issued by A.M. Best is “A++ Superior”. This means the term insurance company is “able to meet insurance obligations.”


The best credit rating issued by Fitch is “AAA Extremely Strong”. This means that Fitch has determined the company is “very unlikely to be affected by adverse market conditions”.

Moody’s Investor Services

Moody’s best possible rating is “AAA Extremely Strong”. But, Moody’s defines this rating differently than Fitch does: Moody’s issues this rating when it determines that “Market conditions are unlikely to affect a fundamentally strong position”.

Standard and Poor’s

Standard and Poor’s provides several services to the financial and investment sector, including the widely known benchmark of large cap stocks, the Standard and Poor’s 500 market index. The highest rating issued by Standard and Poor’s is also “AAA Extremely Strong”. They define this rating the same way that Fitch does.

While these are the best ratings issued by each rating agency, it does not mean that a term life insurance company with a lower rating will not be able to meet its current or future financial obligations. As the ratings agencies review the creditworthiness of term insurance companies periodically, it is possible for a different rating to be issued from one period to the next. Even a financially sound term insurance company that has been paying claims according to the terms of the policies for several years may not have the best rating due to a number of factors.

Policy owners, however, should always make sure that the company from which they purchase a term policy has at least a top rating. As term insurance is a contract lasting 5, 10, 15 or more years, a policy owner needs to feel confident that the insurance company will be able to pay the claim when the time comes.

How Are Term insurance Ratings Determined?

Several factors are used to determine term insurance company ratings. Death benefit payment history, the ability to secure cash and the amount of cash in reserve are all factored in. Balance sheet items like money market accounts and stocks and bonds within the portfolio are compared to potential long-term debt obligations.

Typically, the largest holding of a term insurance company is United States Treasuries. Bonds and T-bills are held in the portfolio because they are thought to be the safest possible investment. Worldwide, investors believe debt sold by the United States will be repaid, with interest, as scheduled. Some investors, however, might be aware that while the current credit rating of the United States is AAA, there are now many who feel this high credit rating will be jeopardized by an increasingly large budget deficit.

Managing the risk and debt obligations a company has are two very important factors used to determine if a term insurance company will be able to maintain a high rating. For example, an insurance company must balance the premium it takes in each year to the amount it pays out each year. Term insurance companies use term insurance actuarial tables. The actuarial tables are used to help calculate the risk the term insurance company takes on when it issues the term insurance policy to an individual.

The size of the premium and the death benefit that could be paid out are based on the age of the insured and his or her life expectancy. The term insurance company needs to ensure that it will not take in fewer premiums than it will pay out in claims. If the term insurance company underestimates this calculation, it will lose money, which will more than likely affect its credit rating. And, if the investments, such as Treasuries, do not offset the loss or provide additional revenue, the credit rating will be affected.

Five Companies with High Term insurance Ratings

New York Life Insurance Company is one of the oldest and financially sound term life insurance companies in the United States. It is the only term life insurance company in the US to have earned the highest possible credit rating from each of the four rating agencies at the same time. New York Life sells a number of different term insurance policies for both individual and joint ownership.

Along with New York Life, Metropolitan Life (MetLife), Prudential, TIAA-CREF and Mass Mutual Life Insurance Company all currently maintain very high credit ratings from each A.M. Best, Fitch, Moody’s and Standard and Poor’s. All of these insurance companies have demonstrated that they have the ability to meet the financial obligations of their clients during both good and bad economic times. These insurance companies show the little risk of defaulting on debt.

That is what is really most important for term life insurance policyholders to remember. Term life insurance policies represent a possible future debt obligation to an insurance company. Its ability to manage that debt in order to pay the claim is one key to a high credit rating.

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