Buy Insurance from a Company That's Going to be Around for A Long Time

Lots of comments on my post titled Former Insurance Agent: "No Way" is Permanent Insurance Better than "Buying Term and Investing the Difference" that are worth reading. Here's one I'd like to especially share with everyone:

One thing that people don't talk about is the default risk of life insurance companies. If you buy a 30 year term life, for example, you have to be pretty darn sure that the insurance company will still be around during the entire 30 years. What happens if they default or go bankrupt? Also, buying insurance from the big names (State Farms, etc) tends to be a lot more expensive. One thought that I had was to buy smaller term life from several different vendors. For example, let's say I want $100K of term life. I was considering buying four $25K policies from different vendors.

Does anybody have any comments on this?

Good point. You have to buy from a reputable, big (usually), secure insurance company -- one that's going to be around for decades -- or your insurance is not worth much. The worst-case scenario is that you pay into a policy for years and years and the company goes out of business the year before you need/use the policy.

When I bought my life insurance policies, the stability of the company I was considering was as important a factor as anything. Fortunately, even strong companies are aggressive on price (thanks to competition) so I really didn't have to compromise.

Comments

[Jen W]

Interesting... thanks for the insight.

[maxconfus]

I am in the process of purchasing term insurance right now and would like to know how you were able to determine one companies ability to pay over the long term versus another company?

[FMF]

Max --

There are various companies that rate insurance companies based on their financial security. Do a web search and I'm sure you'll find something.

[Frank Morana]

What this points up is that insurance is not really what it purports to be. If one needs to carry several policies in order to protect against default, then isn't insurance simply another speculative investment vehicle like any other? The small consolation that comes from carrying multiple policies is simply that, if you lose your benefits, you might not lose all. But what about a situation in which companies fail, not through any fault of their own, but through larger, adverse economic factors in which the entire sector could be affected? The stately image of the "secure and solid" life-insurance company is a pervasive image that has been carried over from previous generations, but this image is not in accord with the real economic environment of today.

[L Berk]

Why I have an insurance policy is primarily because it's free money, no taxes, to my beneficiaries. I'm not weathy and I'm nearing retirement. If I need to I can cash it in at a lesser amount, but it's still green and gives me added comfort to know I still have something to tide me over until I can make another plan.