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Does the Source of Pre-Need Funding Matter

Posted by Christopher Kuhnen on August 1, 2013

In last month’s issue, I shared my opinion of how “vanilla” I felt the entire pre-need insurance provider market had become. It seems to me that one company looks, feels, sounds and basically works the same as the next. How can a funeral home owner cut through all the hype and get to the heart of the matter regarding what the crucial differences are between companies? To answer that question, I enlisted the help of Tom Hardy. Tom has been in life insurance company senior management positions since 1973, including president, CEO of Mayflower National Life and chief operating officer of Provident Life and Accident. Since 2001, he has been president, CEO and primary shareholder of Unity Financial Life Insurance Company, Cincinnati, OH. If you have questions or comments for Tom he can be reached at thardy@uflife.com.

  Although almost all funeral homes understand the value of funded pre-need funeral contracts, there is still the question of who to deal with to make sure the funding will be there at-need. Over the last several years, the overall pre-need funding market generally has been flat. Insurance has been gaining market share and trust has a declining share, largely because of low investment yields and bad publicity in the trust world. In the current environment, I am more comfortable suggesting ways to judge providers of pre-need insurance than trust alternatives.

  Although there are several important ways to judge the strength of insurance companies, the primary focus should be on whether a company is strong enough to live longer than any of its insured customers and whether it is successful and profitable enough in the pre-need market to stay in the pre-need market. Companies that are growing faster than the market without promises that are too good to be true are doing something right!

  Let’s address the second point first. Over the years, quite a few large, solid insurance companies have entered and left the pre-need market. In practically all of those cases, the problem wasn’t that the insurance company was weak; some were among the largest and strongest companies in the industry. The problem was that they couldn’t find a way to make money in the pre-need market and they saw no reason to continue with low or no profits. It is almost never a good thing for a funeral home to become an “orphan.”

  I have run pre-need and non-preneed life insurance companies and in my view the differences are greater than the similarities. In the non-preneed world, underwriters can’t visualize guaranteed issue to 80 year olds and actuaries have heart failure when they see pre-need first year mortality numbers for the first time. The differences can be equally large for the home office operating staff. Much of the business comes from agents who are funeral directors first and insurance agents second. They often know a great deal more about pre-need funeral contracts than they do about insurance contracts. It usually takes time for both parties to fully explain what’s really important to them.

  So far, most large insurance companies that decided to try pre-need, have not stayed with it. Most successful pre-need insurance companies have made pre-need their primary market. In my view, this is because companies develop a culture and it is very hard to maintain more than one culture. A related issue is that pre-need companies have to succeed in pre-need because they have no easy alternative; a very large insurance company with a pre-need division can choose, at any time, to drop pre-need and move on with other priorities.

  How then, should funeral homes choose among insurance companies? Financial strength has to be a key element and there are several measures that can be used.

  A.M. Best ratings are important. Among leading nationwide pre-need companies, we all have either good ratings or no rating. Best says, and I agree, that a good rating is B+ or higher (B+, B++, A- or A). It’s also very important to determine whether a company is getting stronger or getting weaker. This is easily determined by asking whether a company’s last rating change was up or down.

  Within the universe of well rated companies, there are at least two important ratios that are easy to measure – investment quality and expense ratios:

  To avoid investment losses, nothing appears to beat publically traded investment grade bonds. These bonds are rated BBB or above and the higher the percent of assets in this category, the better. Other investment categories can be part of a good portfolio but they are much less liquid and some, like common stock and real estate, can have rapid changes in value.

  Just as is true for funeral homes and most other businesses, insurance companies need to control costs. A low expense ratio allows a better product for the customers and better results for the insurance company. The simplest measure is to just divide the total general expense by the total net premium. The best companies spend well under ten percent of their premium on general expense. All insurance companies report this information and a company recruiter should know the answer and/or be able to get it quickly.

  I don’t pretend that this is the only way to choose a pre-need insurance company but if you are dealing with a financially strong company that is dedicated to the pre-need market, you will most likely be happy with the result.



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