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If you love life as much as I do, you’re going to love life insurance! Life insurance is a super important part of protecting your family with a long-term financial plan in case anything happens to you. The purpose of life insurance is to replace your income for your family if you die. Harsh? I get it—no one wants to think about dying—but just like a fender bender or a flood, it’s good to be prepared before it happens.
There are two main types of life insurance: term life (which keeps things simple) and permanent life insurance (which is more complicated). Term life insurance is for a season of life. Permanent life insurance lasts your whole life—which sounds great, but ends up being a really bad deal. Even though permanent life insurance is way more expensive and confusing than term life, permanent’s still popular . . . somehow. (There are a few other types of life insurance out there, and we’ll look at those later.)
Listen, if you have people in your life depending on you for financial support, you need life insurance. But I don’t want you to rush into a policy—especially if you don’t understand what you’re signing up for. That’s why I’m going to walk you through the different types of life insurance out there and cover all the pros and cons, and help you find the right one for you.
Key Takeaways
- Life insurance has one job: to replace your income for your family when you die.
- If anyone depends on your income for their daily needs, you should have life insurance in place with a death benefit worth 10–12 times your annual income.
- Even though there are many different types of life insurance, the only kind we recommend is term life insurance. That’s because you only pay for it while you actually need it, usually 15 or 20 years.
- All of the other kinds of life insurance are way more expensive, not to mention confusing.
- Every type of life insurance other than term life is some form of permanent life insurance, meaning you pay for the policy long past the date when you probably even need it.
Different Types of Life Insurance
- Term life insurance
- Whole life insurance
- Universal life insurance
- Variable life insurance
- Variable universal life insurance
- Other types of life insurance
Term Life Insurance
Term life insurance is the simplest type of life insurance you can buy because it does one thing: If you die, your spouse, children or other beneficiaries receive a fixed amount of money to replace your income.
Coverage length: Provides coverage for a specific term, such as 10, 20, or 30 years.
Premiums: Typically lower than permanent life insurance, especially for younger people.
Death benefit: Pays out a death benefit to beneficiaries if (and only if) the insured dies during the term of the policy.
Renewability: Some policies offer the option to renew at the end of the term, but premiums will probably go way up.
No cash value: Does not include a cash value component; you’re only buying the death benefit protection.
Related types: Level term life insurance and decreasing term life insurance
Level Term Life
Sometimes, term life insurance is known as level term because the coverage amount stays the same level for the entire term of the policy. (There’s also term life insurance that decreases in payout over time—and I’ll talk about that a little later.) But level is way more common, so people tend to use the names level term and term life interchangeably.
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Here’s how it works: With term life, you pay the insurance company to take on the financial risk of your death during the period (or term) of your policy. Typical terms are 10, 15, 20 or 30 years. So, if you buy a 15-year term life policy with $500,000 in coverage, you’ll make regular premium payments (those could be monthly, quarterly, or annually) for 15 years. If you die during those 15 years, the insurance company will write your family a check for $500,000, also known as the death benefit. It’s that simple.
While a term life policy doesn’t have any monetary value unless you die during your term, it does bring you peace of mind knowing your family will be taken care of if something happens to you. The bottom line is it’s a way to proactively take care of your loved ones so they don’t have to worry about money when you’re gone.
Pros: Term life is usually the most affordable type of life insurance. I recommend you buy a term life insurance policy worth 10–12 times your annual income. That way, your family can invest the payout and live off the growth of that investment, permanently replacing your income if anything happens to you. This is the most cost-effective and affordable way to protect your family long term.
Cons: Term life only pays benefits if you die. Think of term life like your car insurance. Every six months (or maybe every month), you pay your insurance company to cover a claim if you get in a fender bender. But if you don’t have a wreck, you don’t expect a refund on your premiums.
Got Kids? Use These 5 Tips to Get the Right Length of Life Insurance.
If you have kids depending on your income, you might be wondering, How long should my life insurance policy last? Great question!
Whole Life Insurance (Permanent Life Insurance)
Remember how I told you the two main life insurance types were term life (which I just explained) and whole life? Well, the second kind lasts . . . (wait for it) your whole life. Some folks also like to call it permanent life insurance.
Lifetime coverage: Provides coverage for the whole life of the insured . . . as long as they keep up with their premiums.
Investment or savings: Combines life insurance coverage with a savings or investment account.
Premiums: Higher than term life insurance. Premiums remain level for as long as the policy is in force.
Cash value component: Whole life comes with a savings account that is supposed to grow over time and can be accessed through withdrawals or loans (a terrible idea, by the way).
Death benefit: A guaranteed payout to beneficiaries when the insured dies, so long as the premiums are kept up.
How it works: With whole life insurance, you buy a policy and lock in the premium and benefit amount for your whole life. And each month when you pay your premium to the insurance company, a portion of that premium goes into a cash value account that—you hope—grows during the life of the policy. (That’s probably why policies like this are also called cash value life insurance.) When you die, your beneficiaries get the death benefit.
Think of cash value life insurance as a savings account you’re depositing money into every month. It’s a pool of money you own and can access or borrow against. The longer you have the policy, the more cash value the policy has.
Pros: Whole life covers you for your whole life. The policy stays in effect until you die or stop paying your premium. That may sound good . . . until you read these cons!
Cons: Whole life is a rip-off, simple as that. Life insurance has one job—to pay your beneficiaries if you die. Whole life is expensive because you pay for it for your whole life—but you probably don’t need the policy for your whole life. And because part of your premium is used to grow your cash value, you’re paying more for less insurance. That sucks.
And get this: That extra amount you’re paying into whole life policies also doesn’t gain as much cash value as it would if it were invested in a good growth stock mutual fund. Does it make sense to spend more money for less coverage and a bad long-term investment? (That was rhetorical. The only answer is nope.)
Oh, and one more thing: When you die, your beneficiaries receive the death benefit. But what happens to the cash value you built up over all those years? Well, if you didn’t use it while you were alive—it’s gone. That’s right, poof. The insurance company keeps any remaining cash value. Like I said—total rip-off.
Now let’s talk through the other equally bad types of whole life insurance.
Universal Life Insurance
How it works: Universal life insurance has a death benefit and a cash value that earns interest. It also offers flexible premiums—meaning you could potentially use some of the cash value to pay for part (or all) of your premium payment.
Are you still tracking with me here? Because with universal life, there are some major mental gymnastics happening when it comes to purchasing what you actually need.
Flexible premiums: The policy owner can adjust premiums within certain limits.
Cash value growth: Cash value builds up based on premiums paid, with the potential for growth through investment.
Death benefit: Can be adjusted over time, based on the policy owner’s changing needs.
Interest rates: Cash value growth is tied to interest rates, which can vary over time.
Cost: The insurance company deducts the cost of insurance coverage and administrative fees from the cash value.Related types: Indexed universal life insurance and guaranteed universal life insurance
Pros: Flexible premiums are helpful if you need some money to cover an emergency because you could access the cash benefit to lower your premiums for a time.
Cons: Universal life is expensive. Basically, part of the monthly premium of a universal life policy goes toward the death benefit and another part is invested as “savings.” The thought is that the investment will grow with time—and maybe even enough to offset the premiums altogether.
I know these perks (death benefit, cash value, and that sweet, sweet interest) sound like an amazing option, but in reality this is a terrible investment strategy. Universal life policies have super high management fees and low returns on the cash value. Stay far away.
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Indexed Universal Life Insurance
How it works: Just like with other permanent life policies, indexed universal life (IUL) plans include both a cash value portion and a life insurance portion with a death benefit.
The key difference here is that the cash value portion usually tracks a stock market index, like the S&P 500 or Nasdaq 100. Basically, the insurance company uses the index’s performance to determine how much interest will be added to the total cash value in your account.
While IUL policies usually guarantee a minimum interest rate, they also put a cap on your returns—which means your cash value won’t grow above a certain amount no matter how well the index is performing. Add that on top of all the outrageous fees you’re getting hit with, and you probably shouldn’t expect your cash value to grow very much.
Pros: If the index that the IUL policy is tied to does well, the cash value of the account will go up. Plus they usually guarantee a minimum interest rate. And as with regular universal policies, an IUL sometimes allows for flexible premiums or a flexible death benefit.
Cons: So many cons. First of all, an IUL has a built-in cap on your returns. Then the rate of return will always be a little lower than the performance of the index fund because the insurance company will take their hefty share in fees. And what if the market isn’t doing well? The cash value portion of your IUL policy will drop too. Gasp! Shocking, I know. And the unpredictability means sometimes you could pay way more for your premiums, and other times, you could pay less. Avoid this one like one-ply toilet paper and no-show socks that show.
Guaranteed Universal Life Insurance (GULI)
How it works: If you’re like me, you don’t like the idea of having your life insurance premiums tied to market performance. Well, with a guaranteed universal life policy, at least that risk is gone. (Still sucks though.)
Pros: Your premiums stay the same because the interest rates are set from the start of the policy. As long as you pay your premium, you’ll have coverage for the rest of your life. (Why, though?) Best thing you can say about GULI is it’s the least risky universal life insurance policy—kind of like a shallow money pit.
Cons: Since your premiums don’t adjust based on market performance, the plan barely builds any cash value. That’s because guaranteed universal life insurance isn’t really designed to build cash. It’s too busy trying to keep up with the cost of insurance.
Find out more about universal life insurance.
Variable Life Insurance
Variable life gets its name from the way the cash portion of the policy is invested—both your investment choices and their value can vary.
Investment: Policyholders can send part of their premiums into investment accounts, such as mutual funds, stocks, bonds or money markets.
Cash value growth: Tied to the performance of the underlying investment accounts.
Risk vs. reward: There’s some potential for higher cash value growth compared to whole life, but that also means more risk.
Death benefit: You select the face amount your loved ones would receive as a death benefit. And your beneficiaries could also get the face amount plus the cash value of your account or the total of your premium payments, depending on the death-benefit option you chose.
Regulation: Since variable life policies are a securities product, agents need a securities license to sell them.
Pros: The death benefit amount is fixed. Plus, you get to pick from a variety of investment options—and as with any investment, you could see some returns for use in retirement. But . . .
Cons: It’s hard to get much ROI when you keep getting hit with fees! And these policies are riddled with fees and expenses, including transaction fees any time you want to transfer or withdraw money from the policy’s cash account. You could also have your policy lapse and see your coverage canceled because of missed payments from that cash account.
So the variables in variable life are the investments and the ROI—but the things that keep going are the endless fees along with that sinking feeling you could become uninsured at any moment. No thanks.
Learn more about variable life insurance.
Variable Universal Life Insurance
I know it’s starting to feel like the names of these policies are all running together—and let’s be real, permanent life insurance is 10 flavors of the same type of lame. But stick with me.
Variable universal life is a mix of a life insurance policy, a savings account, and a mutual fund. Most 3-in-1 products tend to stink (you know, like those overpowering men’s 3-in-1 body wash, shampoo and conditioner products teenagers like to use), and this insurance product is no exception.
Features: Combines universal life insurance with investment options similar to variable life.
Flexibility: Premiums, death benefits and investment allocations are all adjustable.
Cash value growth: As with many permanent life policies, growth is tied to how well the investment accounts perform—along with the thrills and chills of risk and reward.
Death benefit: Similar to regular variable life insurance, a variable universal life death benefit allows you to select the face amount. And in addition to that face amount, you can also decide if you want the payout to include either the cash value or the total of your premiums paid.
Variable universal life insurance lets you decide how your cash value is invested in a variety of investment options, and you get to pick how risky you want to be with those investments. That’s the “variable” part. And unlike the regular old variable life, variable universal life has a flexible death benefit amount, which means you can choose to increase or decrease your policy’s death benefit. It’s a whole lotta moving parts!
Pros: You’re in control of where your money is invested. But remember that insurance is about risk and who assumes the risk. So, you bear the risk of your investments—not the insurance company.
Cons: Variable universal life policies are expensive and have no guarantees when it comes to their cash value. They’re one of the worst life insurance options on the market because of the high management fees. (Are you seeing a trend here?) Again, you’d be better off getting a much more affordable term life policy and putting that extra hard-earned money in mutual fund investments.
Please, people: Keep life insurance and investments simple and separate. Mixing them up complicates everything and doesn’t achieve anything good. (Have we learned nothing from terrible hybrid products like the ketchup-ranch combo from Heinz known as Kranch Saucy Sauce?)
Other Types of Life Insurance
I’ve shown you the awesome beauty of term life insurance and the ugly truth about that whole life garbage. But we’ve barely scratched the surface. There’s still a lot to talk about when it comes to the wild world of life insurance, so why end the party here? Let’s keep the good times rolling and cover a few more types of insurance that you might stumble into when you’re out shopping for coverage.
Final Expense Insurance/Burial Insurance
How it works: Final expense insurance (or burial insurance) is a type of cash value insurance that covers your funeral expenses when you die.
Pros: It’s relatively inexpensive and saves your loved ones the cost of paying for your funeral.
Cons: Flashy advertisements will make you think you’re sparing your family the burden of paying for your funeral. It’s all about peace of mind knowing your funeral expenses are covered before you die. In fact, it’s often marketed as the best life insurance for seniors.
But burial insurance is a completely emotional purchase that makes absolutely no sense financially. You can easily plan to pay for your funeral by setting aside $50 a month every month starting at age 55.
Let’s say you live to the ripe age of 78 years old, which just so happens to be the average lifespan in America.1 If you socked away $50 a month in a savings account for 21 years, you’d have more than $12,000 saved up for funeral expenses. If you invested that money with an average annual rate of return of 11%, you could have almost $50,000. Since the median cost of a funeral is around $7,800, why not just save up the money to pay for your own funeral and tell the insurance company to take a hike?2
No Medical Exam Insurance
How it works: Applying for either a term or whole life policy used to be like trying out for a sports team. (Not that I know from personal experience . . . I was less athlete and more mathlete back in high school.) You had to get a complete medical screening just to get started! But due to recent market changes, no medical exam policies and touchless exams are the new norm.
Pros: A no medical exam policy means you won’t have to get blood drawn or make an appointment for a physical. And guaranteed issue plans allow folks with health issues who’ve been declined for other kinds of policies to get enough life insurance to cover funeral expenses.
Cons: A no medical exam policy is usually more expensive than a comparable term life policy with a medical exam. And with guaranteed issue plans in particular, keep a couple things in mind—you’ll have a waiting period, and the death benefit basically just covers funeral expenses.
There are two subtypes of life insurance without a medical exam:
Joint Life (First-to-Die) Insurance
How it works: Joint life insurance, also called first-to-die insurance (how . . . romantic?) is a cash value policy marketed to couples who want to share a policy between them. Think of joint life insurance policies as the joint checking account of the life insurance world. The policy covers two individuals for one fee. These policies pay a death benefit as soon as the first spouse dies. Another related term to watch out for is family life insurance, a kind of coverage that’s often packaged with a joint life policy.
Pros: You only pay a single premium.
Cons: If your finances are like most families, one spouse makes more than the other—sometimes a lot more. Remember, the job of life insurance is to replace someone’s income when they die. Joint life insurance really stinks because it takes a one-size-fits-all approach by paying out the same exact benefit to either spouse. (And as a smaller-framed fella, believe me when I tell you that one size does not, in fact, fit all.)
Think about how this kind of policy could screw you over. You could be paying a lot more to insure your spouse’s part-time income from the local fabric store than you would if you were to simply buy two term life policies. A joint life policy doesn’t make a whole lot of sense when you weigh the costs.
And if a couple dies at the same time in some kind of tragic accident? Well, the death benefit goes to their heirs.
Survivorship (Second-to-Die) Life Insurance
How it works: A survivorship life policy, which is also a type of cash value policy, pays absolutely zero benefit to anyone until both spouses die. Then, the death benefit goes to your kids.
Pros: Survivorship policies are mostly geared toward wealthy people wanting to avoid large estate taxes on what they leave behind. They aren’t intended to support your spouse because by that point, you’ll both be in the great beyond.
Cons: If joint life insurance policies don’t make much sense, then survivorship or second-to-die life insurance policies are a complete waste of your money. I recommend you avoid survivorship life policies completely because your spouse isn’t covered when you die. As with any kind of cash value policy, I’m going to beat the dead horse (hopefully it had life insurance) once again: You and your spouse are way better off getting a term life policy at a much lower cost and then investing in a good mutual fund instead.
Group Life Insurance/Voluntary Life Insurance
How it works: Group life insurance (sometimes called voluntary life insurance) is bought by an organization or company—which explains the name group—and then offered as a benefit to its employees.
Pros: The good news is group life is usually free through your employer. It’s also another way to get life insurance without having to take a medical exam.
Cons: Unfortunately, the death benefit from basic group life insurance is nothing big. That’s because these plans typically only offer between $10,000–50,000 worth of coverage—or maybe a few times your salary, if you’re lucky. Remember, I always recommend getting a life insurance policy that provides a benefit 10–12 times your annual income.
Here’s another snag with group policies: If you get a new job, you’ll probably lose your coverage the day you leave your company. The key takeaway here is to always have a separate term life policy of your own in place, no matter what your employer offers.
Accidental Death and Dismemberment Insurance
How it works: An accidental death and dismemberment policy, or AD&D, is a policy that pays out if you die in an accident or lose a limb and can’t work. In the case of dismemberment (ouch!), it pays a portion of the benefit. If you die in an accident, it pays the full death benefit.
Pros: These policies are pretty cheap—usually just a few bucks per paycheck.
Cons: Many AD&D policies won’t pay a death benefit if you die from a medical procedure, a health-related issue, or a drug overdose. And as you get older, your chances of dying by accident shrink a lot. That’s why an AD&D policy is no substitute for—wait for it—a term life policy. Plus, regular life insurance policies already cover death from accidents anyway.
Decreasing Term Life
Here’s a form of term life that gives term life a bad name—decreasing term life. At least it’s not whole life, but there are some drawbacks (and it’s still not as good as good old-fashioned level term life).
How it works: With decreasing term life insurance, you sign up for a death benefit that gradually gets smaller over time until the policy expires. In many cases, decreasing term life is tied to the balance of a debt—like a mortgage or business loan—and is designed to pay off your remaining debt when you die. Mortgage life and credit life are two common examples of this type of insurance. In a nutshell, the lower your debt balance goes, the lower your death benefit becomes.
Pros: The name says it all. It’s term life, so at least you won’t be paying premiums forever. But the amount of the death benefit decreases over time, so I have a hard time calling that a pro. The length of the term is usually tied to debt payoff, but that isn’t always true.
Cons: This whole thing is cons. Instead of giving your loved ones a death benefit amount that’s locked in throughout the term of the policy—which is how level term life works—the payout actually decreases as time goes by. The policy literally becomes less valuable the longer you live, until it becomes worthless the day it expires. That’s not my idea of life insurance!
So, let’s go back and look at that $500,000 term life policy example I mentioned earlier and apply it to real life. If you had a decreasing term life policy and died in the last month of the term, your family would get pretty much nothing. But if you had a regular term life policy, they would get $500,000.
Now, here’s the question: If life insurance is about protecting your family’s long-term financial plan, how on earth can you plan for something you don’t know the value of? That’s the problem with decreasing term life policies. You never know how much the policy will be worth when you die, so it provides your family very little financial security.
Mortgage Protection Insurance
This policy pays off your mortgage when you die, which means your family will probably get to keep your house. The logic is you don’t need as much of a death benefit if your mortgage is shrinking. But it’s a really bad product because the payout must be applied to your mortgage. And if you have no mortgage? That’s right: there’s no payout. In other words, your beneficiaries would get zero. Nada. Zilch. And sometimes the premiums don’t change even as your mortgage shrinks, so you end up paying the same every month for a payout that gets lower over time (assuming you pay down your mortgage while you hold the policy).
Credit Life Insurance
Maybe you think there couldn’t be anything dumber than debt. I thought that, too—until I heard about credit life insurance. This is a product that a bank will try to sell you when you’re taking out some stupid form of debt like a home equity loan. You and I both know how ridiculous it is to borrow money against the equity in your home (at least, I hope you know that). But this is a kind of life insurance policy that’s designed to pay off the bank for that loan when you die—and nothing else.
Here’s a better idea: Never take on any kind of debt (other than a mortgage within your means), and if you already have a loan like this, definitely don’t make the situation worse by buying a really crappy form of life insurance that won’t even replace your income.
Different Types of Life Insurance by Underwriting
Underwriting is the method an insurance company uses to understand how much of a risk you are to insure. They have plenty of tables and stats to help them figure that out. And they use all their numbers to decide whether you need to take a medical exam and how much to charge you for coverage (your premiums). The amount of underwriting needed for your policy will depend on a few things.
Fully Underwritten Life Insurance
For anyone young and healthy, getting fully underwritten life insurance is going to be the most cost-effective way to get a policy. It’ll almost always include a medical exam and a questionnaire about the health history of your family, travel plans and any risky hobbies. (I shouldn’t have to say this, but never lie on these questionnaires. That’s literally insurance fraud, which could lead to your policy getting cancelled or your claims denied, and also makes it nearly impossible to get insurance with another company.)
Simplified Issue Life Insurance
These policies don’t require a medical exam, but they do require applicants to answer a health questionnaire. They might ask if you smoke and if you or a family member have ever had a chronic condition, among other things.
Guaranteed Issue Life Insurance
Guaranteed issue has even fewer strings attached than the simplified policy—you don’t even have to answer any questions about your health! Many companies limit this type of coverage to people who are at least 40 years old, and some companies don’t offer it to those over 80. But if you’re in that age range, you’ll probably qualify.
One drawback here is if you die within the initial waiting period before benefits kick in, your beneficiaries won’t get the death benefit.
The Best Type of Life Insurance
Life insurance should be simple. That’s why I only recommend purchasing a level term life insurance policy. It’s straightforward, it’s affordable, and it’s designed to do one thing over the long term: support your loved ones if you die. And as an added bonus, the death benefits of a term life insurance policy are almost always tax-free.
Term life is the only way to go if you want to be smart, save money and give yourself and those you love peace of mind about the future.
Here’s why I love term life insurance:
- It’s usually the most affordable type of life insurance you can buy.
- It does the one thing life insurance is supposed to do: It replaces your income when you’re gone.
- It’s a proactive way to take care of those you love today so they don’t have a financial burden after you pass.
Get Term Life Insurance in Place Today
When it comes to choosing the right life insurance to fit your family’s needs, you’ve got options. A lot of options. But don’t let that stop you from getting the right policy in place. Nothing beats the peace of mind that comes from knowing your family will be covered if the worst happens.
Whether you’re in the market for a new life insurance policy or just wondering if you’re carrying the right kind of life insurance, I recommend RamseyTrusted partner Zander Insurance. Their insurance professionals will walk you through the process of securing a term life policy that fits your family’s needs.
Next Steps
- Determine what kind of term life insurance works best for you.
- Use the Term Life Calculator to see how much insurance you need.
- Reach out to RamseyTrusted partner Zander Insurance for a quote. They shop across the top-rated companies to find you the best rates for the exact coverage you need.
Frequently Asked Questions
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What type of life insurance should I get?
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In a word (or two): term life! It’s the only way to go if you want to be smart, save money, and truly provide yourself and those you love with long-term peace of mind.
Here’s why I love term life insurance. Like I’ve been saying:
- It’s usually the lowest-cost type of life insurance you can buy.
- It does the one thing life insurance is supposed to do: replace your income when you’re gone.
- It’s a proactive way to take care of those you love today, so they don’t have a financial burden after you pass.
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What type of life insurance offers cash value?
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Most permanent life insurance policies offer cash value. Types of permanent life policies include whole life, universal life, variable universal life, and indexed universal life.
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Can a senior get life insurance?
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Even if you’re older, you can still get life insurance. Having life insurance is the best way to take care of your loved ones after you’re gone. I still recommend term life insurance if you’re into retirement age. (Unless you’re self-insured, which is the ultimate goal.) Signing up for insurance later in life might mean you’ll have a higher premium and a shorter term, but the peace of mind will be worth it.
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How are life insurance companies rated?
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Insurance companies are rated by a credit rating agency called AM Best that looks at factors like a company’s ability to pay claims. AM Best gives an insurance company a letter grade that can range from A++ all the way down to S (suspended).