Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.
An entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and must involve something in which the insured has an insurable interest established by ownership, possession, or preexisting relationship.
The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the insurance policy is called the premium. If the insured experiences a loss which is potentially covered by the insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.
Come rain, sleet, snow or bankruptcy, your insurance company needs to be able to cough up the cash to pay out your insurance claims when you need the money the most. If this doesn't happen, you won't have the money to pay your medical bills, to replace your car in case of an automobile accident, or to rebuild your home in the event of a natural disaster.
Your insurance company's financial position needs to be on solid footing. To ensure that you'll get the money you need in an emergency - even if the company's financial position worsens - you need to do some research into your company's finances. Read on to find out where to look and what to look for.(If everything insurance has you confused, then check out our Introduction To Insurance tutorial.)
How to Choose an Insurer That's Likely to Last
It's hard to know for sure whether any insurance company - or any company for that matter - will still be around in five to 10 years, so how can you tell if an insurance company will exist to service your contract in the years to come? Let's take a look at a few simple actions you can do to figure this out.
First, make decisions about your choice of insurance provider one year at a time. Before you think about renewing your policy each year, check financial ratings, read current news about the insurance industry, and watch trends in the stocks of insurance companies you are thinking about choosing.
Checking Financial Ratings: You can check financial ratings on your state's department of insurance website. Ratings generally range from 'A++' down to 'F'. Similar to report cards, 'A' and 'B' are good, but as you go down the scale you can bet that a particular insurance company isn't currently the valedictorian of financial stability in the insurance world. There is also one rating for companies that are no longer financially rated, which is 'S'. (Learn more in The Debt Ratings Debate.)
Before choosing a company based on financial rating for homeowners insurance, check with your mortgage company to make sure your lender will accept your insurance company as your homeowners insurance carrier. Your mortgage company technically owns your house until you pay off your home loan, so it's in the lender's best interest to protect its investment by ensuring that you are insured by a financially secure insurance provider. (For some simple tips to save money and get better coverage for your house, see Insurance Tips For Homeowners.)
Current News About the Insurance Industry: Even if the news you read is about general insurance industry problems, this is a sign that you need to be researching your insurance company or any company you are considering. Conduct internet searches with insurance company names in conjunction with key phrases like "financial problems" and "failure to pay claims".
Watching Stock Trends: Look up the stock prices for your current or potential insurance company. This can easily be done through many investing websites including Investopedia's Stock Search. This is also available through an online brokerage website or your financial advisor's website. You will want to check for trends in stock price over the last six months to five years. If the trend is consistently going downward, it's time to take a harder look at the financial rating - an 'A' rating can quickly became a 'B+' or a 'C-' if the company's financial position worsens. (For more on evaluating insurance companies, check out The Industry Handbook: The Insurance Industry.)
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Red Flags About Payouts
Even if your insurance company is financially stable, it doesn't mean payment on a claim will come easily. Use state agency websites to view all metrics, not just financial metrics, to determine the likelihood of a proper payout in the event of a claim. Pay special attention to the number of complaints listed for any insurance company you currently use or may use in the future. This will give you an idea of the difficulty others have had in receiving payment on their claims.
Throwing in Your Insurance Towel
It's tough to know when the exact right time it is to bail on your insurance company. After all, even investing legend Warren Buffett doesn't always know the right time to dump a stock. You must use your judgment and ask yourself the following questions about your level of satisfaction with your insurance company.
Some good questions include:
Are you happy with the customer service you are getting? Do you wait on long holds when you call in to ask a question? Are the customer representatives friendly and knowledgeable?
If you ever had a claim, did the insurance company pay out quickly?
Does your insurance company offer the best rate? Have you compared your insurance rate with other carriers recently and noticed your current insurance is a little high?
Do you know other people who have had better experiences with claims through a different insurance provider? (Simple errors can leave you unprotected. Read on to learn more in 5 Mistakes That Can Ruin Your Life (Insurance).)
Stay Informed
Your state's department of insurance is your best friend when it comes to finding out what rights you have when you buy insurance. Call this department to get information on your state's guarantee fund for insurance policies. The guarantee fund is money set aside to pay out on insurance claims if your insurance company can no longer pay you due to a financial pitfall. Similar to the Federal Deposit Insurance Corporation (FDIC) insurance on bank accounts, there are maximum amounts this fund will pay out. Call your state's insurance office to find out how much these amounts are before you pick an insurance policy. (For more, check out Are all bank accounts insured by the FDIC?)
The Bottom Line
Luckily, choosing an insurance company is not a lifelong commitment. You can switch insurance providers at any time. However, in order to reduce the number of hassles and increase the likelihood that your insurance company will pay your claims, pay attention and research financial and customer service information on your prospective provider. If you don't, your insurance company's problems could become your personal financial disaster. (Learn how to read one of the most important documents you own in Understand Your Insurance Contract.)
