Gauging the Health of Your Life Insurance - TheStreet

Life insurance comes in many flavors, each designed to suit a specific need. But the main purpose of life insurance is to guarantee the financial security for your loved ones after you pass away.

And the financial security of your insurance provider is an important factor in making sure your family is taken care of.

There are four main kinds of life insurance that offer different advantages and benefits:

  • Term life insurance is a policy with a set time limit on the coverage. These policies, usually the least expensive in premiums, provide a stated benefit upon the death of the policy owner, as long as the death occurs within a specific time period. However, the policy does not provide any returns beyond the stated benefit, unlike permanent life insurance policies.
  • Whole life insurance offers both insurance and an investment that accumulates a cash value you can withdraw or borrow against. With whole life, regular premiums pay insurance costs and contribute to a savings account that is allowed to grow tax-deferred. It also provides lifetime coverage with level premiums and a fixed death benefit.
  • Universal life insurance is similar to term life insurance, but, like whole life insurance, it has a savings element. The key with universal is its flexibility in the amount of regular premium payments. This is popular with people with fluctuating incomes.
  • Variable universal life insurance provides permanent protection to the beneficiary upon the death of the policy holder. This is generally the most expensive kind of cash-value insurance because it allows allocation of a portion of the premium to a separate account made up of investment vehicles within the insurance company's portfolios (i.e., stocks, bonds, equity funds, bond funds and money market funds). These policies are considered securities contracts, are regulated under the federal securities laws and must be sold with a prospectus.

We haven't heard of any large life insurance companies becoming insolvent in about 16 years, since Executive Life and Mutual Benefit were seized by government regulators in 1991.

There were five life insurance company failures in 2005 and only two in 2006. These were mostly small companies with very little geographic diversification. The rest of the industry has continued to do well because of years of prudent underwriting, solid investment results and strong capitalization.

In fact, the number of companies earning our top safety ratings of A-plus, A or A-minus has increased nearly 30% over the past year. Consolidation in the industry over the last decade or so has led to many large insurance companies becoming the "low-cost providers" of life insurance as many smaller firms have found it too costly to compete. But large total asset size does not necessarily equate to financial safety.

Life insurance, the product, can be used as an estate planning tool, but more often it is used to purchase protection for one's family in the event of one's passing. Your dependents and heirs can sleep soundly if your life insurance protection is purchased from a financially strong company.

All the more reason to periodically check the financial safety of your life insurance carrier. Our ratings are based on many factors, including an insurer's level of capitalization, the trend in its profitability, the quality of its investments and its ability to deal with mild and severe economic adversity and potential liquidity problems.

The top three insurers on the list are

State Farm Life Insurance Company

,

Teachers Insurance and Annuity Association of America

and

American Family Life Insurance Co.

All three earned A-plus ratings.

The chart below shows the top 10 U.S. Life insurance companies on the basis of their respective ratings, total assets and total life insurance premiums (including group and individual life insurance).

These companies have all maintained excellent ratings over the last five years due to their strong management, excellent capitalization and liquidity positions and relatively solid profitability. You can sleep soundly if you've got your life insurance with any of these highly rated life insurers.

Peter Brink is a senior financial analyst for TheStreet.com Ratings. In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.