May 13, 2022
  • May 13, 2022

Is it safe to buy life insurance from a startup?

By on December 6, 2021 0

Young, innovative life insurance companies promise fast online policies, among other attractions. But are these “insurtechs” risky because the business might not exist decades from now, when your family will have to cash your policy?

The stability and reputation of the insurer is more important to buyers of life insurance than to buyers of other types of insurance. The 2021 edition of the JD Power US Life Insurance New Business study, published in November, reported that auto insurance buyers were ten times more likely to choose the company that offers the lowest price compared to any other. other. In contrast, those who bought life insurance were only twice as likely to choose the cheapest policy – a factor that linked the importance of I’m among buyers with the perceived stability of the business. Company stability barely registered as a purchasing priority for auto insurance.

According to Robert M. Lajdziak, director of global insurance intelligence at JD Power, life insurance buyers take a long-term view and place more importance on “confidence in the long-term viability of the business.” company and its expertise in space ”.

This could pose a dilemma for consumers when it comes to insuring with a business that has been around for a few years rather than decades. But insurtechs are taking steps to reassure customers of their stability. Here is what you need to know.

Insurtechs team up with former life insurance experts

Insurers are rated on financial stability by specialist agencies that analyze data such as net income, profitability, and net worth. For example, AM Best, a leading insurance rating agency, rates companies between A ++ (beyond superior) to D- (worse than poor) on their “ability to meet their outstanding insurance obligations. “.

Since companies can’t get rated immediately – at least not with the biggest agencies – tech insurance companies have been rushing to research and project financial stability. Many have succeeded by forming partnerships with established companies with high ratings and a long reputation, according to Lajdziak. “Most life insurtechs are backed by an incumbent,” he says. “The most popular example is Brighthouse by MetLife. “

The long-established partner often drafts the incumbent’s policies, that is, he issues the policies himself and backs them up with his financial assets. This allows buyers to use the senior partner’s ratings as an arbiter of the financial stability of the incumbent’s policies.

For example, Bestow’s policies, one of our life insurance choices, are issued by leading insurer North American Company for Life and Health Insurance. This means Bestow sets the terms and pricing for policies, but if its business falters, NACL is there to support the death benefit.

For consumers, the alliance can also give credibility to new entrants in the market. “When ‘challenger brands’ compete in a market with companies like New York Life, which has just celebrated its 175th anniversary, they need to make it known. [to consumers] they have expertise in space, ”says Lajdziak.

Some start-up insurers are rated by smaller agencies

Not all insurers write policies through a partner. Some write their own policies and thus qualify for their own evaluations.

A challenge for buyers, however, is that newbies are unlikely to be rated by agencies that rate life insurers the most, like AM Best, Moody’s, and Fitch. Rather, they might be noted by lesser-known names in the notation. For example, the leading Lemonade is rated (and well) by Demotech, an agency founded in 1985 – over a hundred years after the AM Best store opened in 1899.

The new agency has slightly different stability criteria; it assesses insurers on “their area of ​​focus and the execution of their business model rather than just financial size,” according to United Policyholders, a nonprofit consumer advocate. Demotech has been considered a competent rating agency by the National Council of Insurance Legislators, along with AM Best, Fitch, Moody’s and others.

Different agencies, different rating systems

The experience and reputation of insurers is important, and reviewing financial stability ratings is a good place to start when looking for life insurance. There is no guarantee that a blue chip company will not go bankrupt, writes life insurance agent Michael Quinn on, “but it is highly unlikely to happen.”

Most insurance reviews, including Money’s for life, take financial stability into account when making their choices and may even include the actual ratings in the reviews. Otherwise, you can usually find the ratings on the websites of the insurers.

To fully understand the scores, however, a bit of homework is required, especially when comparing multiple agencies. For example, Haven Life, another of our life insurance picks, points out that “A + is the second highest rating from AM Best, but an A + is the fifth highest rating from Fitch.”

If you’re worried about the future of your policy, even after choosing a stable insurer, know that the likelihood of your life insurer going bankrupt and leaving you without insurance is statistically low. According to the National Organization of Guaranteed Life and Health Insurance Associations, of the roughly 800 companies that currently underwrite life insurance in the United States, fewer than 40 that have a presence in multiple states have encountered problems over the past twenty years.

The struggling companies were not upstarts, but established smaller, traditional businesses. And many have not failed outright, but have been placed in what is called “rehabilitation,” a court-supervised process that aims to stabilize and preserve the business and its assets.

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Guarantee associations cover losses, up to a point

There is kind of a safety net if you have a policy with a life insurer that goes bankrupt. If a business goes bankrupt, your state’s guarantee association – each state has such a group, as Puerto Rico and the District of Columbia do – will step in and cover lost death benefits. Or will at least to a point.

However, if your policy provides for a death benefit of at least six digits, you probably will not be reimbursed the full amount. In most states, the guarantee association reimbursement reaches a maximum of $ 300,000, although some states have a higher maximum (the limit is $ 500,000 in New York State, for example) .

Since it is common (and often recommended) to insure your life for 10 times your annual income, a limit of $ 300,000 could easily be lower than your actual death benefit.

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