The Insurance Company

At this writing, the local paper has an article about an insurance agency in a nearby town that just quit doing business. When the administrative staff arrived for work, the doors were locked. The agents didn't get paid and nobody knows where the insurance applications, premium payments or policies stand at the moment. Scary?

Insurance is, by and large, regulated by each state. Each state has a commissioner who is a member of the National Association of Insurance Commissioners (NAIC) which establishes guidelines and model legislations that regulate the industry. Some things differ from state to state but, generally, issues relating to dealing with the public are all about the same.

The state insurance commissioners have a lot of power to regulate the industry within the state. They have the power to investigate insurance companies and agents, to issue cease and desist orders and to penalize violators. Actions such as coercion and intimidation, unfair discrimination, false advertising, etc. are labeled unfair practices and can be punishable by the insurance commissioner.

Each insurance company must be licensed by the insurance commissioner in each state where they conduct business and each of their products must be approved before the insurance company can start selling the product to the public in that state. Additionally, each state requires the people who sell insurance to be licensed by the state. Each candidate for an insurance license must pass a licensing exam administered by the state and cannot have a history of shady dealings. Those individuals who sell variable products must also be licensed by the National Association of Securities Dealers (NASD) which has even stricter rules for agents to follow when dealing with the public. Variable products are considered both life insurance and securities.

There are over 2,000 insurance companies and only a few basic insurance product types. Which company has the ‘better product’ for you? It’s hard to know because each product type can be purchased from a number of companies and each company has their own little twist to set it apart and, hopefully, give it an advantage over the others. Often there is just a very small difference between the companies’ products. It may be a small interest change, a free option, or even the way you make your payment. But there is a great amount of competition within the industry and with some knowledge of the products, you can make an informed decision and find the policy must suitable for your needs.

The National Association of Insurance Commissioners’ website www.naic.org in the section Consumer Information Source allows you to locate information about an insurance company, including closed complaints against the company, the states in which the company is doing business, and company financial information.

There are single line insurance companies that specialize in specific markets (for example, group medical insurance) and multi-line companies. You have to look at the reputation of the insurance company in your market, study their products and try to make an informed decision. A potential applicant for any insurance product should always check the rating of the company. If the company is a good company, it should be proud to show you their rating. After all, they are taking your money, giving you only paper and promising to be available when you need them.

Most experts recommend purchasing from companies that have a rating of A++ to A-. However, not all rating services use the same rating system. For example, the highest rating for A.M. Best is A++ to A+, for Standard & Poors it is AAA, for Moody’s it is Aaa and for Fitch it is AAA.

Importantly, each state has a guaranty fund to protect consumers if a licensed insurer becomes insolvent. These state organizations are funded by the insurance companies and if one of the companies becomes financially unable to pay the claims, the association will step in to meet the insolvent company’s obligations. You should always make sure the insurance company you are considering doing business with is actually licensed in the state to conduct that particular business activity. You can do this by contacting the state insurance commissioner’s office.

Some states require and most insurance policies provide a ‘free-look’ period. After the policy has been delivered to the policyholder, the policyholder has a prescribed period of time to look at the contract documents and has the right, for whatever reason, to return the document for a full refund of the premiums paid. Normally, the policy provides for a 10-day free-look period. Each policy will spell-out the free-look period in the contract documents.

Also note that the insurance company has the obligation, once the application is approved and the policy is issued, to carry out the terms of the contract as long as the premiums are paid by the policyowner. However, there is no such obligation for the policyowner to pay the premiums. The policy will be quite clear, however, that if the premiums are not paid the policy will terminate.

There are many types of insurance companies but the two most common life insurance companies are stock insurance companies and mutual insurance companies. A stock company is like any other business corporation. The company is organized and incorporated to do the business of insurance. It has stockholders which may or may not be policyowners and any dividends are paid to the stockholders. It has company officers and directors who are responsible to the stockholders.

In a mutual insurance company, the owners are the policyowners. If you purchase a policy you become a part owner with voting rights and a share in the company’s profits, if any. If any earnings remain after paying claims, expenses, and funding the reserve account, the policyowners are paid a dividend which sometimes can be used to offset the premium payments.

The National Association of Insurance Commissioners’ Consumer Alert: Tips for Buying Life Insurance at www.naic.org/pressroom/consumer_alerts/index.htm offers eight tips to help you get the best value for your life insurance dollar.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.