The insurance contract is simply a promise to pay a death benefit as long as you keep paying your premiums. Bernie Madoff promised to pay back his investors and look what happened. His investors got little to nothing back. A contract, a promise or a guarantee is only as good as the company making it. Rest assured there are some steps you can take before you purchase life insurance.
When selecting life insurance you, or your agent, should spend some time researching the stability of the company. Life insurance companies are regulated at the state level and all states have an insurance division that is responsible for monitoring them and their products. Generally the companies have to conform to certain standards and maintain appropriate financial reserves to ensure they have funds to pay out claims to their customers. So the first step would be contact the state insurance division and do a little background check.
The next step is to do some basic research on the insurance company. How long have they been around, do they have a good reputation, is anybody making complaints about them? The internet can be very useful for this type of research.
Finally, check the ratings of the insurance company. There are 3rd party rating agencies that rate the financial stability of the insurance companies. In fact, just about every time you get a quote for life insurance you will see these ratings from companies like A.M. Best, S&P, Moody’s and Fitch. Next to the rating agencies name you will see letters like AAA, A+, BBB, B-, C, D etc. Every company uses a slightly different system but they are all very similar. Ratings with the letter A are rated higher then letters further down the alphabet (A > C). Multiple letters are rated higher than single letters (AAA > A). Finally the plus symbol is better than the negative symbol (+ > -). Of course just like anything in life it’s not a fool proof system but it is the best we have for evaluating and comparing life insurance companies.
Just like any major purchase in life you should do some due diligence to make sure you are getting a solid product. If you follow these recommendations you can develop more confidence that all the insurance company’s commitments will be fulfilled.