With the steady move away from employer pensions to Defined Contribution retirement plans, such as 401(k)s, more retirees are faced with the question, “How do I make my savings last as long as I live?” One of the possible responses may be to purchase an individual annuity from a life insurance company.

While the features of an individual annuity may be tailored to the retiree’s unique circumstances, every annuity is in essence a long-term contract to provide retirement benefits. Given the steady increase in life expectancies, the benefit period of a typical retiree could easily be 30 years or longer. This long time frame means an insurance company’s financial strength is a very relevant factor; you want to know the insurance company will be able to deliver on its promises, both now and in the future. How can the average consumer evaluate the financial strength of life insurance companies?

Most consumers will rely on the assessments of several ratings services. And while these rating organizations provide consumers with definitive evaluations of insurance companies’ financial fitness, they each grade on a different scale, which can be confusing. Here’s an example, from an insurance company brochure for one of its annuities:

Are these good grades? On one hand, there are a lot of “A’s.” But how does an “A“ grade merit an “Excellent” from one assessor when an “A2” is only “Good” from another? And if your rank is 6 of 21, does it mean the company is barely in the top third of the class? It’s apparent that more information is needed to understand these.

Confused? Let’s go to the Comdex.

Since rating agencies do not use a universal scale, and have different assessment terms, comparing company ratings can be a challenge for the consumer. In an effort to bring clarity to the process, the Comdex was developed. Instead of deciphering the letter grade, the Comdex concludes that the grade is not as important as the rank of the insurance company relative to other insurance companies. A company whose grades place it in the top 20 percent is stronger than one in the top 40 percent—regardless of letter designation or description. The Comdex percentile ranks the companies on a scale of 1 to 100, with “1” being the weakest and “100” the strongest in relation to other companies that have been evaluated by at least two of the four independent ratings services (A.M. Best, Standard & Poor’s, Moody’s Investors Service and Fitch). The result is a number that is self-explanatory, and can be used to gauge the financial strength of an insurance company relative to its peers. Many experts consider Comdex scores in the mid-90s to represent “the best of the best.”

As an example, here are the evaluations from the four major ratings agencies for The Guardian Life Insurance Company, and their translation as a Comdex score:

Although Guardian received the highest evaluation from only one ratings company (A.M. Best), its overall ranking puts it in the 99^th percentile, literally one of the top few of the class.

As more older Americans and retirees seek to secure their financial future apart from pensions, they will inevitably be faced with making long-term transactions with life insurance companies, for both life insurance and annuity payments. These are often one-time decisions with decades of consequences. Getting an assessment of the insurance company’s financial strength should be a critical part of the evaluation.

Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at epreil_wagroupllc.com. See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice.  You should consult your tax or legal advisor regarding your individual situation.

By Elozor M. Preil