Should you be selling final expense insurance?

If "final expense insurance" makes you think of schmaltzy television commercials aimed at seniors, it might be time to change your perspective. Consider these findings from the 2012 LIC/CSG Final Expense Survey Report of 30 insurers:

Thirty companies reported a total of more than $433 million in new final expense sales in 2012. This included nearly 700,000 policies issued for an average premium of $649.
New premium was split fairly evenly with l3 "high volume" companies reporting more than $5 million in new sales (for 93 percent of the total) and 17 companies reporting less than $5 million.
Twenty-seven companies reported a total of more than $1 billion in-force premium from more than 2 million policies with an average premium of $558.
Median first-year commission reported was 130 percent. Median second-year commission was 12 percent. However, there was a wide range of both high and low commission companies with the majority of companies paying a total of 180 percent to 200 percent over the first six years.

Low cost, high efficiency

There is no clear-cut industry definition of what a final expense policy is, says Jeffrey Shaw, CLU, ChFC, executive director of the Life Insurers Council in Atlanta. Shaw loosely defines it as a small-face-amount life product with a death benefit intended to cover burial and other expenses associated with bereavement, but there are different ways of delivering that policy, he says.

Some policies are sold by large insurance marketing organizations (IMOs) that rely heavily on lead generation by TV and direct mail. Their agents—often captives—typically go out on one-interview sales calls to prospects with lower- to modest incomes. "They're in and out of the house generally within 30 to 45 minutes and then they're on to the next house," says Shaw.

Doug Turner, senior vice president and chief marketing officer with the Londen Insurance Group in Phoenix, notes that there isn't a great deal of differentiation among final expense policies. Londen Insurance's subsidiary, Lincoln Heritage Life Insurance Co., is one of the longest-established insurers in the final expense market with roughly 6,000 licensed agents.

"Different companies are going to have different riders and things like that that they attach to their products," he says. "But for the most part, final expense is a whole life product written to help pay the final expenses, not just funeral costs but any other final expenses that come up, such as doctor bills, flying people in from out of town for the services, things like that. Most companies have a modified death benefit for people who can't qualify for the whole life product. And some companies will have a limited pay, like a 20-pay policy. That's really about it. It's a pretty vanilla-type insurance product."

The modest premiums for the coverage require insurers to underwrite high volumes of business. A key to processing that business effectively is efficient underwriting, and the LIC/CSG survey found that 94 percent of new premium reported in 2012 was through some form of simplified underwriting.

"If you're going out and waiting for medical records or trying to do any lab reports or anything like that, it really just isn't going to work from a cost-expense standpoint," Shaw says. "That's where the simplified issue process has really taken over."

Customer profile

From a high-level perspective, Turner qualifies prospects as those age 50 and older. That's the starting point; from there, Lincoln Heritage refines its target markets.

"When we do our direct mail program, we do not want to mail a 60-year-old who's making $100,000 a year," he says. "Obviously, he already should have the financial means to take care of his funeral and that's a waste of time for us and it's a waste of time for our agent."

A better prospect, says Turner, is someone who would be hard-pressed to cover final expenses. "There's a study that was done that found 35 percent of people weren't saving anything for retirement right now," he says. "Those are the kind of people that we need to talk to because they need to have some sort of safety net there that if they had an unexpected death now or in the future after they quit working, that it doesn't destroy them financially."

That market segment won't appeal to advisors seeking mass-affluent or wealthy clients. Nonetheless, Turner believes final expense coverage can work for most clients because it provides estate liquidity through rapid claims payments. Clients with large-face policies with big carriers probably aren't going to receive the benefit for weeks, if not months, he says. In contrast, final expense carriers pay quickly.

"We pay our claims within 24 hours," he says. "Most of our competition pays their claims within a week's time. That's why it can really help somebody who's doing financial planning because you know that money is going to be there, it's going to be there right now, the people aren't going to have to dip into any of their other investments or savings to help pay their funeral bills."

Attracting the big players

Many of the final expense insurers focus largely on that industry segment but the market's growth is attracting more carriers. Earlier this year ReliaStar Insurance Co., an ING company, rolled out its UltimAssure Whole Life final expense product. Alan Lurty, head of business development for ING U.S. Insurance Solutions in Philadelphia, says ING sees potential in the segment. "We saw our opportunity to put a household name into this market that we felt was somewhat underserved and to bring a new approach to it in terms of the underwriting and issue-process versus what was there currently," he says.

Although agents can complete an UltimAssure policy application on paper, the company's tele-underwriting process is completely paperless. The agent and the underwriter collaborate in real-time to collect required information from the prospect. The underwriter can verify the applicant's ID and check information with the Medical Information Bureau (MIB) and a prescription drug database. That process leads to rapid results, says Lurty.

"You get an immediate decision and then the client can voice-sign rather than having to paper-sign and the policy gets sent 48 hours after the completed app is received. So that's a pretty significant thing that we're doing.

For more, see:

The death project

The widow planner

Dancing with the Star of Final Expense