Know Your Insurance Company

Read this if you own an annuity or life insurance policy. Read this even if you don’t, because you need to know about the ways you can check up on an insurance company’s rating.

Have insurance companies been exempt from federal bailouts and rescues? No. These are rough times for insurers too. So how can you learn about any risks to a) your policy, b) your annuity, or c) the insurer behind it? And how can you identify the insurance companies that have weathered the recession well?

Comdex rankings. You can’t judge a book by its cover, but you can judge an insurance company by its Comdex ranking. This is a useful place to start.

As the name implies, the Comdex is a composite index: an average percentile ranking of credit ratings provided for life and health insurance companies by firms such as Moody’s Investors Service, A.M. Best Company and Standard & Poor’s Corporation.

The Comdex ranks insurers using a weighted average on a scale of 1 to 100, 100 being best. If an insurer has a Comdex rating of 85, for example, that means the Comdex has ranked its strength and solvency as superior to 85% of the insurance companies in the index.

If you want to see the actual ranking/opinion of Moody’s or Best or another credit firm rather than an average, visit iii.org/individuals/life/buying/strength/ - this is the website of the Insurance Information Institute, a longstanding information source for media and the public about the insurance industry. Or link to your state insurance department via naic.org.

What if the insurance company doesn’t have such a good ranking? Some small and mid-sized insurance firms will have lower safety rankings. That might make you think twice. If you hear that an insurance company has been downgraded three or four times, you want to keep an eye on it. In this financial climate, buying a new annuity from a top-rated company is especially wise.

There are state guaranty funds in case insurance companies fail. While annuities aren’t FDIC-insured, you may have up to $100,000 of coverage by your state’s guaranty association in case of failure. We’re talking cash value; death benefits are often protected by states to a limit of $300,000.

State guaranty funds are designed to protect death benefits, guaranteed minimums, and other guarantees in an annuity contract. They usually don’t cover losses incurred by investment subaccounts.

What about share prices? These are not necessarily indicative of an insurance company’s financial health. Some of those stock prices have dipped as a consequence of attempts to raise capital. While such efforts may weaken existing shares of a company, fresh capital improves the insurer’s capability to pay claims.

If an insurer is in real trouble … state insurance departments will usually monitor the company’s health and try to stave off failure by helping them find more capital or arranging a sale to a healthier insurance company that can fulfill annuity payments and the guarantees that come with long term care insurance, life and disability insurance, and living benefit riders.

When new companies take over annuities, the annuity owners make payments to or collect payouts from the new insurer. The terms of the annuity usually aren’t affected as a result.

Surrender? Not if you can help it. If you surrender an annuity, you might end up with less than you would get if the insurer had failed. Surrender charges can be sizable, while state guaranty funds commonly offer protection up to $100,000 or $300,000.3

If your annuity provider appears to be on shaky ground and the surrender charge period is over or just about over for the annuity, you could consider a 1035 exchange - a tax-free exchange from your current annuity contract into a contract with new terms, which could be provided to you by a higher-rated insurance firm.

Long Term Care Insurance

How will you pay for long term care? The sad fact is that most people don't know the answer to that question. But a solution is available.

As baby boomers leave their careers behind, long term care insurance will become very important in their financial strategies. The reasons to get an LTC policy after age 50 are very compelling.

Your premium payments buy you access to a large pool of money which can be used to pay for long term care costs. By paying for LTC out of that pool of money, you can preserve your retirement savings and income.

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. AARP and Genworth Financial conduct an annual Cost of Care Survey to gauge the price of long term care. The 2008 survey found that

• The national average annual cost of a private room in a nursing home is $76,460 - $209 per day, and 17% higher than it was in 2004.
  
• A private one-bedroom unit in an assisted living facility averages $36,090 annually – and that is 25% higher than it was in 2004.
  
• The average annual payments to a non-Medicare certified, state-licensed home health aide are $43,884.
  

Can you imagine spending an extra $30-80K out of your retirement savings in a year? What if you had to do it for more than one year?

AARP notes that approximately 60% of people over age 65 will require some kind of long term care during their lifetimes.

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire. Those in poor health or over the age of 80 are frequently ineligible for coverage.

What it pays for. Some people think LTC coverage just pays for nursing home care. Not true: it can pay for a wide variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability or people who just need assistance bathing, eating or dressing.

Choosing a DBA. That stands for Daily Benefit Amount, which is the maximum amount your LTC plan will pay for one day's care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA every day. The DBA typically ranges from a few dozen dollars to hundreds of dollars. Some of these plans offer you "inflation protection" at enrollment, meaning that every few years, you will have the chance to
buy additional coverage and get compounding - so your pool of money can grow.

The Medicare misconception. Too many people think Medicare will pick up the cost of long term care. Medicare is not long term care insurance.
Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are receiving skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That's all.

Now, Medicaid can actually pay for long term care – if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of policies. But the annual premiums (about as much as you'd spend on a used car from the mid-1990s) are nothing compared to real-world LTC costs.