Written by Jay C. Hardy

  This month I asked Jay C. Hardy, President and COO, Unity Financial Life Insurance, Cincinnati, Ohio to share with us why pre-need insurance companies have those seemingly unreasonable rules and regulations in place that drive field agents crazy from time to time. His simple explanation will help enlighten you.

  All pre-need insurance companies have procedures in place that can seem unfair or inconvenient to writing agents and funeral home owners. Here is a look at the practices that are most likely to drive you nuts, and an explanation of why these rules are in place.

  One of the basic facts about your pre-need customers is that they create value for the insurance company, by agreeing to set aside their money for the unknown period of time that is the rest of their life. The longer the money stays at the insurance company, the more value they have created. The more value the customer creates, the more the company can share with its agents and funeral homes. The logical conclusion of this is that clients who pass away quickly will be unprofitable and clients who live long lives will make up the difference.

  It is not possible to sell life insurance to people in their 70s and 80s and not experience some first year mortality. This is especially true among 70 and 80 year olds who are pre-arranging their funerals. Your insurance company does not think negatively about an agent just because some of the agent’s clients die in the first year. Chargebacks are a normal part of selling insurance in this niche.

  The reserve accounts are designed to help facilitate a smooth income for agents who are doing a good job. When an agent suffers a chargeback, the company will recover whatever portion of the commission it can from the reserve account. By going to the reserve account first, agents are able to keep more, if not all, of the income they earn from policies sold in the current period. Since chargebacks are typically a surprise event, the reserve account helps prevent negative surprises to agent’s income.

  Reserve rates typically vary across products because different insurance products experience different lapse and mortality rates. Single Pay policies can’t really lapse, but they do suffer from first year mortality. Multipay policies have lower first year mortality rates than Single Pay policies, but they can fall off the books if the customer stops paying. The longer the premium paying period, the more likely the policy is to lapse. Policies that are on Direct Bill are far more likely to lapse than policies that pay premium by ACH or PAC; as a result, many companies place a higher reserve rate on Direct Bill policies and some companies will not accept direct bill sales.

  Although it rarely happens, insurance companies occasionally rescind a policy after the claim has been filed. The most typical reason for a rescission in the world of pre-need is that an insured was discovered to have answered a health question dishonestly. Health questions are generally used to determine if an insured can qualify for an immediate level benefit or if they will be covered by a modified (or graded) benefit in the early years of the policy.

  If a misrepresentation is discovered, the beneficiary will usually just receive a return of the premiums paid. Answering the health questions honestly will always result in a larger death benefit. In our experience as a long time pre-need insurance provider, rescinded policies are almost never challenged by the surviving family members; the family members are generally aware of the health history of the deceased.

  Overall, pre-need insurance companies understand the great value that their agents and funeral homes bring to them so none of the rules are intended to make life difficult for the sales team. The low interest rates of the last few years have reduced profitability for pre-need insurance companies, and practically all other life insurance companies, so our company and our competitors have a continuing job of trying to balance the benefits and costs among the insureds, the funeral homes, the agents, and the company.