A big part of your decision when comparing term life insurance plans is of course the premium. In fact, this is probably the biggest factor since we narrowed down the selection to strong carriers. The final piece usually deals with the life carrier ratings by the major rating agencies which we list next to each plan. It's important to keep in mind that most States also have a Guarantee Fund to further safeguard your coverage. Let's take a look at these funds and how they factor into your plan selection.
Life insurance is a bit trickier than other types of insurance (outside of Long Term Care) in that the expected (although unwanted) benefit may be decades in the future. If a carrier offers a really low rate (too low) which is inadequate to successfully manage the claims in the out-years, this offers little help to you. For this reason, we really try to offer only the strongest carriers and a wide selection of those companies. For smaller amounts of term life coverage ($300K and under), the State Guarantee Funds pretty much protect most of your benefit in case of a catastrophic situation occurring within your chosen life carrier. Could this actually happen and why?
A quick refresher. The carrier is trying to spread risk among as many people as possible for the lowest possible (must cover overhead, claims, and return to shareholder if necessary) life insurance rate to each policy holder. They have to manage this delicate balance of income versus expense and still keep reserves as required by the government and life carrier rating agencies in order to have a good rating. There are freak occurrences or just plain bad management of these variables. As for the first situation, you could have catastrophic claims experience resulting from a much higher percentage of subscribers that pass away. A single digit increase in this percentage can definitely affect the overall financial performance of a carrier. That's why carriers are required to keep reserves. The carrier could also have miscalculated their actuarial tables which is how they view the probability that a given person (age, gender, health class, etc) will pass away. On the second front, the carrier may just have underpriced their plans hoping to gain market share and deal with the resulting claims later with a wider base. It's a gamble and not one you want to be on the wrong side of as a subscriber.
That's where the guarantee funds come into play. Each State has certain amounts of life insurance benefit they will guarantee. This functions very similarly to the FDIC insurance for deposits in a bank. These amounts typically run around $300K maximum death benefit for one specific person's life. Essentially, that means per person and it's the aggregate of all insurance. Meaning, you can't guaranteed $300K with one carrier on a given person and also another $300K through a different carrier/policy on that same person. It's important to check on your particular State's allowable amount here at the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA, 13873 Park Center Road, Suite 329, Herndon, VA 22071).
This link will allow you to double check how much your State guarantees and we advise this before purchasing term life insurance.
Keep in mind that most people quote higher amounts than $300K so health carrier rating is still important. Protecting $300K of a $1M policy from a shady carrier is not a good strategy. Level term life insurance accomplishes all above.
