Financial Strength of Life Insurance Companies
A life insurance policy is a promise to pay a claim at time of death. This promise is only as good as the company providing the promise and, as such, the financial stability of that company is an important factor in deciding which company to use in proving the policy.
During the recent 2008/2009 financial crisis that swept most of the industrialized world, banks and insurance companies were the subject of intense strain. One of the largest insurance companies in the world, AIG, was forced to seek protection due to its toxic assets.
Therefore, anyone applying for insurance as part of their estate plan should examine the financial stability of the proposed insurance company. Financial ratings from Moody’s, Standard & Poors and AM Best should be reviewed with particular attention to any recent downgrades. In Canada, the Minimum Continuing Capital and Surplus Requirements ratio (“MCCSR”) is a measure of the companies ability to meet its claims now and in the future. If the ratio is falling below 175%, there is a problem; whereas ratios above 200% are considered very strong.
Over the last 20 years, there has been a great deal of consolidation of insurance companies. People may have bought a policy from one company, but through various mergers and acquisitions, that policy is now covered by another company. In 1994, Confederation Life had to seek creditor protection. The life insurance portion of the Confederation life was sold to Aetna Life, which in turn was sold to Maritime Life. Maritime Life was then acquired by Manulife Financial when it merged with John Hancock Life Insurance Company. In 2009 the life insurance division of AIG Life Canada was sold to BMO Life (part of Bank of Montreal). While not a guarantee, these provide an example of what may occur should any future insurance company run into financial difficulty. However, the best advice is to seek from the insurance advisor a complete and thorough analysis of why one company is being recommended versus another.