If you could only buy bonds like you can buy life insurance.

Pay less for AAA than for A? Yep. All day long. Want to know a secret? The life insurance market is a very inefficient market. Want to know another secret? Almost nobody realizes it. That's great news for you because that means you can buy AAA life contracts for less than those issued by A rated life insurance companies.

Typically in the bond market, you see prices lining up in a fairly strong correlation with S&P and Moody's ratings. Sure, some aberrations are present but if you take 100 issues with similar maturities and sort the data by credit rating, you'll see a corresponding yield to maturity that pretty much tracks with the credit ratings. The AAA will of course have the lowest yield to maturity and it will increase as the credit quality decreases. And rightly so. You should receive a greater reward for accepting more risk. Conversely, an issuer should be rewarded for a AAA rating. It's very visual if you look at this kind of demonstration on a spreadsheet.

Well, there's another market that is covered by the big rating agencies: S&P and Moody's. That is the life insurance industry where the ratings are known as Claims Paying Ability or CPA ratings. These ratings are essentially credit ratings that help buyers understand the credit quality of life insurance policy issuers. Carefully reviewing the credit quality of the company issuing a life policy is a frequently overlooked step in the decision-making process; even by those who typically perform extensive due diligence before making financial commitments. But a simple review of ratings is well worth it.


Mr. Snyder is CEO of Spectrum Direct, an online life insurance market system featuring instant life insurance quotes from the highest quality life companies known to have the best pricing in the industry. www.SpectrumDirect.com
*A comprehensive analysis of policy feature such as conversion rights is beyond the scope of this article.