Before he became director of marketing and assistant vice president at Oxford Life Insurance Co. in Phoenix, Michael Frahm worked as a certified financial planner. It was during that time he saw firsthand how important final expense (FE) insurance can be to seniors, especially those of limited means.
One day, he visited an elderly couple. The husband had just been diagnosed with terminal cancer and the wife stood to lose not only his pension, but one of two Social Security checks. Since they didn't have a final expense policy, the couple's savings would have to pay for his funeral and medical costs. "I couldn't do anything for them because it was too late for him," he recalls. "That's why I take it to heart. It did leave her destitute, where she was not previously."
Frahm and others who sell final expense insurance agree the product is experiencing heightened sales these day, because, unfortunately, stories like the aforementioned one are becoming more common as seniors and boomers see their savings dwindle, leaving them with little or no resources to pay for a funeral that can cost an average of $6,560 (according to a 2010 survey from the National Funeral Directors Association).
"Folks don't have the money in savings," Frahm states. "Typically this market is going to be for clients that are actually living Social Security check to Social Security check. So we are seeing a definite increase."
Statistics from LIMRA also underscore a rise in premiums in the final expense market.
Alejandro Chetto, a final expense insurance agent with Golden Memorial Plan/Lincoln Heritage in Fairfield, Calif., says this product is typically purchased by lower to middle-income seniors, with annual resources of between $10,000 and $50,000. He's also seeing a trend whereby the children of baby boomers are buying final expense insurance if their parents cannot afford it.
Yet affluent seniors can benefit from this type of insurance as well. It not only preserves assets that could be left to heirs, it also prevents squabbling among the children over who's going to pay for the funeral. "That's why they establish a separate final expense policy---just so the kids don't become enemies," Frahm says.
Ease of underwriting
There are many reasons why a senior would purchase a final expense policy rather than traditional life insurance (or buy both). For one, it's cheaper due to smaller face amounts. And unlike life insurance, the FE policy is less complex and easy for a client to understand.
But perhaps the top factor that makes an FE policy attractive to a potential buyer is a less rigorous underwriting process, specifically when it comes to a senior's medical history, which, in some cases, might make a life policy cost prohibitive.
"[Clients] can have some minor health problems and still be able to qualify for a plan without going through major underwriting," confirms Ron Dudas, an advisor with Senior Advocate Services in Gilbert, Ariz. He sells final expense insurance for several carriers.
That doesn't mean, however, the policy is handed out to just anyone. Typically, the cutoff age is 85, and someone recently diagnosed with a terminal medical condition would not qualify.
A simplified underwriting process further means that most policies can be approved quicker, sometimes at the point of sale, after the agent does the risk assessment. "The producer sees the [client], tells them they are approved and gives them a conditional receipt right then and there," Frahm says. "The policy is issued in a day or two."
Besides the ease of underwriting, the lower cost of a final expense policy is also a plus to many seniors. According to Dudas, face amounts can range of $5,000 on the low end up to $30,000. Therefore, monthly premium costs run from an affordable $35 to $200 a month.
Those premiums are based on a variety of factors, such as age, gender and smoker status. Whether the policy is graded--meaning the benefit is paid out at a percentage of the face amount predicated on when the policyholder dies--also impacts the premium, Frahm notes. To estimate how much a policyholder would need to pay for a funeral, he calculates life expectancy plus inflation.
What's more, those rates are locked in, Dudas points out. "Final expenses policies are generally whole life [contracts] so the rates never increase," he says. "And the death benefits never go down."
Another advantage over traditional life insurance is the ability to get the payment quicker after the policyholder dies. "Final expense is an immediate need that can be paid within 24 hours when the required documents are received," Chetto says. A payout from a life insurance policy can take much longer, he adds.
Although final expense remains a fairly standard product, new features are being added. For example, one carrier offers critical illness benefits, whereby if the policyholder becomes ill, the policy would pay them a small sum of money to help fund medical expenses, Dudas notes. Some contracts allow the policyholder to get discounted prescriptions.
"Most final expense policies build cash value so [buyers] have the ability to use that cash if they ever got into a situation where they couldn't pay their premiums or couldn't put food on their table," Dudas says. "For a period of time they are able to borrow money from the policy without having to surrender it. So it has living benefits as well."
In some instances, policies, according to Dudas, can be written with a term-life rider for a grandchild so that if the child before age 25 has a serious illness the policy could convert into a permanent or whole life contract without the grandchild having to prove insurability.
Some carriers are changing the payout increments in graded policies as well. In the past, if a policyholder died within two years of purchasing the policy, he or she would receive a return of premium plus an interest rate, Dudas says. Now, some graded policies are written so that if someone dies after one year after purchasing FE insurance, the person gets 40 percent of the face value of the policy; 75 percent after two years; and 100 percent after three years.
In general, though, policies are kept pretty simple in order to keep costs down. "Because you are dealing with middle to lower-income seniors, you don't see [a lot of] features on it," Frahm says. "The cost associated with putting those riders on a final expense policy is going to increase the premium significant enough that it's going to have a financial effect on the senior."
Benefits to advisors
Foremost, offering final expense insurance can serve as a bridge to cross-selling opportunities into other products. "If you are [dealing with] the senior market, it opens up to annuities and medical supplement," Chetto finds.
When it comes to selling any product, it all goes back to building a relationship and trust between a client and advisor. In the case of final expense insurance, an advisor is helping clients with a need most people don't want to speak about, Frahm says. "When they do that, [advisors] can see if there are additional assets they can help them [with]," he says. "You can say, 'I helped you out with this. What about your relatives and your neighbors? What are they going to do?' "