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How does one wisely choose an insurance company?
This is probably the first question a person asks when looking for an insurance company to serve his needs. After all, there are thousands of insurance companies in the market ranging from the small players to the established giants.
Insurance is an intangible product so it is imperative to be careful from where you should buy it. Many people have had bad experiences with many insurance firms in the past because they dealt with the wrong companies. To be safe, take your time and do some digging for information before making your choice.
A common mistake of many buyers is relying exclusively on the advice of their insurance brokers. It’s not entirely a bad thing but keep in mind that brokers work to get commissions. It is possible that they would likely recommend a company that would give them the highest commission but not the best product.
Factors To Consider When Choosing Life Insurance Company
Here are some other factors to look into as you do your research into these companies:
1. The Company’s Reputation
Don’t get taken in by flashy advertising or expensive marketing campaigns. Check out how long the company has been in the insurance business. A good track record should be your primary consideration when looking for an insurance company. Look them up on the Internet and do some research about how they do business. The Internet could be a good source of information about them especially customers’ reviews that describe their service and reliability.
You may not find one that has 100% positive reviews – in fact; you should look at the negative feedback. Find out the nature of the problems brought out by the dissatisfied customers. If you find reports about non-compensation of its policyholders, then that is a big red flag for you. You’ve better not do business with these people.
Being in the business for some time and having many policyholders may be some good signs but financial strength is key. Look at the financial reviews to help you answer that one important question.
2. Financial Stability
Each state regulates the insurers in their jurisdiction. Their respective insurance departments monitor the financial health of licensed insurers so they can do business in the area.
States promulgate many regulations to prevent insurer insolvencies. Just the same, some insurance companies still fail. So before you buy a policy, make your own evaluation about the insurer’s financial health.
The good news is, evaluating an insurer’s financial health does not require you to be a business or math expert. Rating firms have done the hard part for you. Some of these firms are A.M. Best, Standard and Poor’s, Moody’s and Fitch. Each of these agencies follows their own rating criteria. Because of this, one company can get a high rating from one agency and get a low rating from another. So consider looking at multiple ratings when evaluating an insurance company.
3. Premium and Cost
A premium is an amount that you pay the life insurance company. Even for the same amount of death benefit and insurance type (i.e., term life insurance) the premium can differ widely among companies. This is because some companies have product features that others don’t have or maybe, they just simply charge higher. So the first step in comparing policies is to compare similar plans based on:
- Your age
- The type of policy and its features (see how to choose the right type of life insurance)
- The amount of insurance coverage you want
Remember this: the cost of the premium is not always proportionate to the amount of protection of the policy. One policy might have a higher premium but might have additional benefits (like policy dividends) than others. Maybe two companies might promise policy dividends but for different amounts and different times. In some cases, the higher premium may give a lower coverage or protection.
So how can you tell what a policy’s cost is
Your company should tell you the policy’s net payment cost index (the number of death benefits provided in the policy). They should also tell you the surrender cost index (amount you’ll get if you surrender the policy in the future for its cash value).
Use the surrender cost index if you are planning to keep the insurance only for a specific period of time. Use the payment cost index if you are planning to keep the policy indefinitely. The rule is, the lower the cost index, the better.
4. Service Quality
This is important when choosing an insurance company. Find out their employee’s attitude towards potential customers like yourself. Are they available to respond to inquiries whether by phone or in person? Do they patiently listen to your needs or are they eager to make a sale? These are some questions you need to answer before you make a choice.
The trend today is buying insurance online. Although it is convenient and easy, you still have to be careful about buying insurance products through the net. It is advisable to buy insurance from a company that has a physical presence in your locality.
This way, in case serious problems arise, you have an office to run to. Also, buy from a company that has a specific license to sell in your state. This will avoid all the hassle should you need to file a lawsuit for claims against them.
6. Full Disclosure
No surprises, please! Choose a company that has a full disclosure policy. Know all the terms and conditions of the product you are buying as well as the many do’s and don’ts. An ideal company should be clear and open about its clauses and conditions. But some companies hide clauses inside the fine lines and use these clauses later to avoid paying their policyholders.
Many policyholders are equally guilty because they do not try to understand the policy. Some just sign and agree on the forms without even reading the entire contents. It is important to read and know all the provisions of the policy before you sign it. It would even be better if your lawyer can read it before you sign.
Choosing an insurance company for your needs is not an easy thing, considering the financial meltdown in 2008 and 2009. Several financial institutions and insurance companies have folded up, merged with bigger companies or sold some of their divisions. Don’t worry too much: state guaranty funds will pay up to a certain amount per policy in the event that your company sinks. Lots of luck to you!
The Smart Investor content is intended to be used and must be used for informational purposes only. We are not an investment advisor and you should NOT rely on this information to make investment decisions .