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  • August 2023
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The End is Just the Beginning: Potential for growth in final expense coverage

  • Brian Sibley
  • Nathan Hill
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A pair of roses rest on headstones in a graveyard
In Brief
While death, like taxes, may be inevitable, it does not have to financially burden those left behind. According to RGA's Brian Sibley and Nathan Hill, a certain type of life coverage — known as final expense or “burial” insurance — can be an affordable option and a powerful bridge across a yawning coverage gap. 

This can include paying bills, dividing assets, and managing the burial or cremation. But while death, like taxes, is inevitable, it does not have to burden those left behind. A certain type of life coverage — known as final expense or “burial” insurance — can be a powerful bridge across a yawning coverage gap. 

Final expense is offered in lower face amounts than traditional life insurance policies and provides a small death benefit that can be a financial lifeline for struggling middle- and lower-income families. The lump sum payout can be used to pay funeral expenses, burial costs, medical and hospital bills, loan balances, and credit card debts, as well as meet other end-of-life needs. 

A Booming Potential Market 

The potential market is vast and growing as populations age and a coverage gap widens in the United States. According to a 2019 Social Security Administration U.S. Census Bureau Population projection, approximately 10,000 of the baby boomers, born between 1946 to 1964, will turn 65 every day for the coming decade, and many of the members of this massive generation are expected to outlive their retirement savings, leaving little cash to help loved ones pay for end-of-life expenses.  Of the 100 million Americans between the ages of 50 and 80, one-third have no cash or investments saved for retirement and rely solely on Social Security income for living expenses. According to a 2017 Life Insurers Council (LIC)/Competiscan final expense Survey, a typical final expense applicant is likely to live on a monthly income of $2,000 or less and is commonly a single or widowed female with a high school degree, a blue-collar work history, and relatives or children still living in the household. In other words, a death benefit can neatly address the needs of these under-protected Americans. 

Though low margin, final expense can be lucrative. The 33 top final expense carriers surveyed by LIC had more than 3 million policies in force paying more than $2 billion in premium, and the average premium per policy sold had grown to an attractive $747 by 2017. Still, navigating this specialty product line requires expertise and close monitoring as pricing assumptions can easily miss profit targets. Most companies that enter the market write unprofitable business at the beginning before they adjust their programs to better reflect the risks.  

Mastering the final expense market demands a deep understanding of the applicant and the product design. Final expense is not “pre-need,” a popular alternative death benefit. Unlike final expense, pre-need coverage contractually obligates a preferred funeral provider to offer funeral services at a guaranteed price. This form of insurance is typically a guaranteed issue product with an automatic offer.   

In contrast, final expense is typically sold by independent agents as a small face-amount simplified issue policy. Sales are common to lower-income individuals aged 50 to 85 years, with face amounts of $3,000 to $30,000. While final expense can be sold as term coverage, these policies are more frequently one of three forms of whole life benefit:  

  • A level death benefit carries the tightest simplified-issue underwriting, and a full death benefit is provided regardless of the cause of death. 
  • A graded death benefit offers often 30% of level-death benefit in the first year and 70% in year two, moving to 100% by year three, and involves looser underwriting. In addition, a full death benefit is often provided for accidental death.   
  • A modified death benefit returns premium often at 10% interest if death occurs in the first two years and involves the most relaxed underwriting. The full death benefit is often provided for accidental death.  

Most sales are conducted face-to-face, and the industry trend is to accept an electronic or voice signature, with point-of-sale decisions collected and recorded via a laptop or tablet.  

Final expense is normally underwritten using a simple life insurance application and does not require fluids or paramedical exams like large face amount policies.  To underwrite this business, companies rely on personal health interviews or third-party data such as prescription histories, fraud checks, or motor vehicle records. Underwriting tele-interviews and prescription histories can often be used to help the agent complete the application process.  

Historically companies relied on telephone interviews to confirm or verify disclosure, but more recently to improve customer experience, companies are relying on the third-party data indicated above and giving instant decisions at the point of sale without the interview.

Also, coinsurance can deliver vital capital support to help ceding companies pay the high first-year commissions to agents. It can also transfer mortality, lapse, interest rate, and expense risk from the ceding company to the reinsurer. Having a reinsurance partner who sees many programs in the industry and can help you implement best practices can be a key to your success in this market. 

At RGA, we are eager to engage with clients to better understand and tackle the industry’s most pressing challenges together. Contact us to discuss and to learn more about RGA's capabilities, resources, and solutions.

Complexities of Simplified Issue 

Given its older applicant pool and reliance on simplified underwriting, final expense policies can be particularly vulnerable to anti-selection risk. Commonly one or two pages in length, applications are often tiered for modified, graded, or level death benefits, and the use of language is critical. 

Insurers that develop the most carefully crafted questions can achieve more accurate disclosure, while those that rely on application questions that are unclear or indirect can concentrate the worst risks. For example, a common mistake is to fail to specifically screen out applicants with chronic obstructive pulmonary disease (COPD) diagnoses or those who are already receiving supplementary oxygen by asking a direct application question.  

The most successful final expense carriers have clear and concise applications, supported by telephone interviews to confirm or verify disclosure, MIB database checks to reveal serious impairments and provide activity indexing, and prescription histories to help verify insurability and applicant risk classifications.  

Underwriting is far from the only consideration. Because non-disclosure is a challenge, the performance of producers can also have a noticeable impact on the value of a block of final expense business. Insurers must consider the agent contracting process, including commissions, training, and incentive structures. Those with the most efficient administration and claims adjudication also have an advantage.  

Gatekeeper to Promise Keeper

Actuarial practice matters deeply. Unusually, for example, relative final expense mortality decreases with increasing issue age relative to population mortality, and industry relative mortality tables do not necessarily fit the final expense. Many insurers underestimate mortality upon entry, so active experience monitoring is essential to mitigate anti-selection risks and adjust if rescissions are too low and lapses are too high. Insurers that are newer to the market are well advised to seek advice from reinsurers for help in structuring a program and managing in-force. In addition, reinsurers can support the large capital outlay needed to fund the acquisition of a new business or help to transfer risk when asset returns are too low or expenses are too high in the early years after market entry.  

Also, coinsurance can deliver vital capital support, including mortality, lapse, interest rate, and expense risk transfer, and reinsurers can offer vital best risk assessment expertise.  

In Summary  

Several trends suggest final expense may be poised for dramatic growth in the next decade and could open the door to new and under-served markets. Demand is at an all-time high, even as the recent COVID-19 crisis starkly illustrated the need for mortality protection for financially insecure families. Economic and demographic trends will also offer tailwinds. By 2030, all baby boomers will be age 65 or older, and many of these seniors can benefit from the peace of mind final expense coverage brings.  

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Meet the Authors & Experts

Brian Sibley
VP, Business Development, U.S. Individual Life
Nathan Hill
Nathan Hill
VP and Actuary, Mortality Pricing, U.S. Mortality Markets