The term "burial insurance" has a special meaning. It refers to a situation where compromises have been made in product, the application form, underwriting, and possibly the marketing, in order to accommodate agents who specialize in the burial insurance sale. Agents selling regular life products sometimes use a presentation that stresses final expense or funeral cost as the "need" for a small whole life policy, but that is just a sales approach, and not the specialized situation discussed here.

The purpose of the procedures peculiar to burial insurance is to permit the issue of a policy to "overage" applicants, generally, anyone over age 65, without the "problems" agents perceive in standard underwriting at older ages. That would include problems such as a medical exam, a long form application, and probably one or more APSs. Even more important to the agent is the fact that, with standard underwriting, about 25% of the overage applicants would be declined. The agent that does a significant portion of his selling in the senior market will consider that unworkable. He wants a very short application, simplified underwriting or guaranteed issue, and full life commissions. In return, he is willing to sell a product that has a significantly higher premium that many of his clients would pay if fully underwritten.

The limited underwriting peculiar to burial insurance obviously entails higher mortality. The company hopes that the extra premium built into such policies will be sufficient to cover the higher mortality cost. Here the company runs into a basic fact. There is no way to add enough extra premium to cover the mortality that will result if the company receives only severely substandard business (that warranting a decline or heavy rating). To have any margin, the company must receive a mix of business that includes lives that exhibit standard or only slightly substandard mortality. The mix that the company will receive is determined by the prospecting method used by the agent. The policy design, loading, even the application questions, are actually less important than is how the agent prospects. Unless the management has a thorough understanding of the way its agents are finding people to sell to, it will have no control over its mortality or any idea of what it is likely to be.

I suspect that most companies are losing money on burial insurance. The exceptions are probably those that specialize in it. Since life mortality is a long term prospect, It is difficult to determine in early durations what ultimate mortality will be. . Excess mortality that becomes apparent in the first few years after issue is probably a warning that the company is experiencing severe selection, but is difficult to distinguish from normal fluctuations. In the normal situation the best guess at future mortality will be based on managements' common sense understanding of what the agents are doing. Knowing what is happening to you is not a bad idea in any line of insurance, but it is a matter of survival with burial insurance.

Notes

Discussion

The way agents choose a company also introduces a form of selection against the company. There always seems to be a number of burial insurance agents looking for a carrier, often because their previous birth got out of the business or pulled back some of the compromises in underwriting. While the normal search for low premiums and high commissions is a given, the dominant issue is underwriting, or the lack thereof. The company that will issue the worst mortality business will have the easiest time hiring these agents.

In most markets it is an advantage to an agent to be with a company that really understands its market and knows what it is doing. For many agents in the burial insurance business the reverse seems to be true. A company that is just entering the burial business or otherwise fails to comprehend the risks will seldom ask any questions about how the agent prospects or finds his clients. The company will assume that it is protected by doing what it thinks everyone else in the market is doing. Here the argument that "all the competition is doing it" is particularly seductive. What agent wouldn't love a company that will take all of the declines in his file and allow him to solicit applicants that would be declined elsewhere?

Actually, it is impossible to know what, or how, another company is doing in this market. Copying the application and the underwriting rules the agents tell you the other company is using won't get you the same results. First, you don't know whether the other company is actually profitable in this line. Second, even if it is, it will be because of the way its agents are prospecting or the natural markets they have, details you cannot determine.

Burial insurance agents are always specialists in the over age market. Some agents prefer the older sales leads, and some agents reject them entirely. The older people are said to be easier to sell and are home during the day, but they are not good prospects unless the agent has a burial product with the aforesaid compromises. An agent for a company that doesn't have that will find he has nothing appropriate to sell, or if he does, he faces the common $25,000 minimum face, a medical, and difficult underwriting.

Underwriting is the major force in this agent specialization. Most agents hate underwriting, for obvious reasons, and will sometimes act contrary to their own interests to avoid it. When the non med or some other limit is at $100,000, you will see a lot of applications in the 90s, even if the agent could have placed twice that. In the over age market for smaller policies, the higher declines are offset by a substantially reduced cancellations. If 25% of the sales will be lost at all ages, it should make no difference whether the loss was caused by buyers remorse or a decline, but with the agent, it does. The demoralizing impact of a decline is far greater than that of a cancellation.

Logically, a non burial insurance specialist who can offer a fully underwritten whole life plan should be just as successful with the older prospects, and would have desirable day work to make a full day. For better or worse, a salesman is more of an emotional being than a logical one.

Burial Insurance is always based upon a whole life product and is usually sold on the life of a older person. The significantly higher average age of the applicants makes mortality a larger cost factor, while increasing the pressure to abbreviate underwriting to reduce the percentage of applicants that are declined. Efforts by companies to reconcile these conflicting pressures (or to ignore them) have created the distinctive features of burial insurance.

Mortality will vary depending on how the product is sold. The prospecting method, i.e. how the buyers are found, will determine the degree of filtering out normal risks in favor of persons predisposed to be interested in acquiring insurance to pay for a funeral. An agent knocking on doors filters out no one, and a random sample of people hear the presentation. The degree of selection would be no greater than it is by every buyer of life insurance. Probably the other extreme is selling through funeral directors, taking applications on people that are interested in making arrangements for a funeral. That filters out most people, who don't often drop by the funeral home to choose caskets.

In that vein, it is logical to expect that prospecting by telephone will be likely to produce lower mortality than prospecting by mail. If you are insuring lives on which funeral arrangements are being made, well, what can I say?

Underwriting is generally limited on small policies to keep the underwriting cost reasonable relative to the premium. The hope is that the reduction in cost will cover the increase in mortality.

However, even that limited underwriting is commonly viewed as unworkable for burial insurance. When the average applicant is in his 60s or 70s, normal non med limits call for an exam, and the questions on the standard application will generate answers that call for an APS. The standard approach is to ask fewer questions, often only 5 or 6, so you don't find out things that would cause further investigation or a declination.

Selection against the company can be created by underwriting rules as well as by the way the agent prospects. If you offer the short app, graded death benefit, or guaranteed issue through brokers who sell more extensively underwritten (and thus cheaper) policies with other companies, you will get only the applicants that the broker thinks would be declined by the other company. You can't add enough extra mortality premium to cover that.

Even if an agent writes all of his burial business with you, you will experience selection if you have both a regular burial policy and a graded death benefit (or guaranteed issue) plan. Many agents will offer the later only to applicants when the health questions reveal that the applicant probably will not qualify for the regular plan.

The company that has the "two part app", where the answers determine which policy will issue, has made it certain that selection will be present on every sale. This type of application is said to be necessary to recruit agents specializing in this product. Is it possible to write such business profitably? Maybe. As always, it will depend on how the product is sold. If the agent uses the combination app on all his sales and has a prospecting method that does not also select for poor mortality, it may be possible to get a mix of standard lives in the "Part A" group.

Most burial insurance is sold to older age prospects on whom standard underwriting would produce a decline percentage which can be 25% or more. Since the agents cannot bear this if such sales are a significant portion of their business, the company usually relies on some combination of the short application, the graded death benefit, increasing face values, or guaranteed issue to obtain issue of enough substandard cases to satisfy the agents.

Companies heavily into burial insurance usually deem it necessary to offer either a guaranteed issue or a graded death benefit policy in addition to their "standard" policy, even where the standard policy is offered on a short app with 5 or 6 questions. With the "two part app" mentioned above, the determination of which policy will issue is made on the basis of the answers on the app. If the answer is "no" to the six Part A questions, the standard policy is issued. If there is a "yes" on Part A, but "no" to all Part B, the graded death benefit policy (or GI) is issued. If there is a "yes" on Part B, it is going to be a decline, but the agent knows it right then, and can then switch the sale to a different carrier for either guaranteed issue or different questions.

You know you lose money on a graded policy if the insured dies early, but what about the ones that survive the three years? Graded death benefit is issued with the same premium as the standard policy. After the period, the face is also the same as for a standard issue. Therefore you are betting that mortality of someone who was not standard to begin with, but that survives the period, will be no worse a risk than the person who qualified for the standard policy. If, on the other hand, the company uses a policy that has a higher premium, with immediate full benefit, as the Part B issue, it is betting that the higher premium will compensate for the early mortality. It is not clear which is better for the company, but if it is anywhere near even, I would prefer the immediate benefit, simply to avoid the disputes at claim time. It would seem that the insurance company should be the one in the business of insuring the risk of early death, rather than the insured.

Burial or "Pre-need" whole life sold through funeral homes can best be understood in terms of the economics of the funeral business. At least 75% of the cost of delivering a funeral is fixed cost. Therefore each incremental funeral is mostly profit (or reduced loss). If the home can collect for the funeral in advance, or secure the assignment of a life policy, it will seldom lose that funeral to another home. If the home has an arrangement where it can insure the life and receive a commission, even better. If the home collects the full price of the funeral in advance (pre-need), in most jurisdictions it can store the funds in either a trust or in a single premium life policy (receiving a commission).

The natural affinity of funeral directors for life insurance means that there are always pre-need deals looking for a carrier. Generally these have to be guaranteed issue. Here is an actual example of a deal that was being shopped recently:

The policy is applied for by the funeral home. The insured knows nothing of the insurance, having pre-paid $5,000 for the funeral. The $5,000 becomes the single premium on a paid up policy on which the face increases 3 1/2% each year for 7 years, and the funeral home gets a commission of up to $1750, which is charged back if the insured dies the first year.

Doing the arithmetic, on a first year death the carrier received $5,000 and paid out $5,000, and had some transaction cost. Otherwise, the carrier has $3250 (after the commission) to invest to cover a $5350 face (plus 6 more annual increases) and costs. Look a little thin for the carrier? Looks are apparently deceiving, as the actuarial demonstration showed profit as a percent of premium of 23%. How? As usual, the secret is in the assumptions about the mortality table (or you might say "longevity") and investment yield. In that case I believe it was assumed the insured would live an average of 27 years. No question about it, the actuary can make final expense work. But can you? To quote a friend of mine, this stuff is "terminal insurance".

Guaranteed issue whole life passes the "all the competition is doing it" test, as it is available from a number of companies, some with a few questions, but some with none. No one disagrees that there has to be a load for extra mortality on such plans. The problem is that it is impractical to add enough to cover a pool of all declines, which might be table 16 and up, which is 5 times standard mortality. Mortality isn't the only cost in the premium, but you are still looking at several times the standard plan (which already has extra mortality load), and this is impractical.

Issuing life insurance with no health questions doesn't appear to be a business you could be in very long unless you can get a good mix of healthy insureds to offset the declines. About 70% of persons over age 65 are standard and about 30% are declines. Surprisingly, there are almost none in between, less than 5%, issuable with ratings through table 16. What you need is a reasonable expectation that you will get enough of the 70% in the mix to reduce the mortality to the extra mortality premium in the product. You might obtain a viable mix if your agent writes only GI on older persons because he doesn't want to put up with the hassle of declines, or figures most older folks will be declines anyway. On the other hand, you don't have much chance if you offer an underwritten plan and a guaranteed issue plan through the same agent. Then the healthy ones get the cheaper plan and the others get the guaranteed issue. Agents tend to be pessimistic about underwriting, so selection against you won't be perfect. To get that, you have to do as some companies I have heard do, which is to underwrite the plan, and issue the backup plan only to the declines. I have only heard about this from agents, so perhaps it is an extinct beast, like the dodo. A rather apt analogy.

Companies that are unable to produce an adequate flow of new business may try to acquire production. Most available companies are in the same boat, having little or no new business, but there is an exception. There are usually a number of burial insurance companies on the market. Let's say you skip over the ones that have gone broke paying death claims and concentrate on the ones whose surplus problems appear to be caused by the surplus strain of producing lots of new business. Remembering that some burial insurance can be profitable, the trick is to select the ones in that category. Or, if you are buying blocks of business, the blocks that will have a profit margin over what you paid.

I have never figured out a way to do effective due diligence on a burial insurance company, and I don't think the actuaries have either. The problem is that since profitability is dependent upon how the business is sold and you can't tell this looking at the block. All those whole life policies look the same once they are on the books. And unless the seller explains some really ridiculous and obvious situation, like sales in the funeral home by the director while showing caskets, how do you know how the sales were made? Were they from a general agent that just doesn't want to fool with underwriting and writes the guaranteed issue on everyone over 65? Or are they from the general agent who sends you his declines from another company? I have heard a lot about the former, but I have only run into the later.

Due diligence will include a study of the mortality experience, but the credibility will be low unless you have significant volume and some assurance that the nature of the production has remained steady over time. That would be a rare situation in the burial insurance business.

The mail order companies would seem to have the best chance to get a profitable mix of business. They don't have agents helping to select against them, or the pressure from agents to not do any underwriting at all. And for the most part, those companies have keep the face offered small.

In the scramble for agents, there are now companies that will sell you a $50,000 policy, no questions asked. Perhaps you can see buying a $5,000 policy through the mail if you aren't particularly sick, but who would pay more than twice as much for a large face policy without at least trying for a regular policy?

The internet sale of burial insurance makes the selection problem worse. With mail order, the person is seeing only your offer at that moment. With the internet comparison shopping for an application that doesn't inquire into your particular health problem is inevitable. You can choose "no questions asked", a few questions if the wrong ones, or things like this"

"Persons who are uninsurable, but need or want life insurance, are able to purchase up to $50,000 of virtually guaranteed life insurance without medical exams. Premiums are higher than standard rates, but protection is available and policies build cash value"

This article calls guaranteed issue life last chance insurance. For the company, I would call selling guaranteed issue whole life over the internet "no chance" insurance. The good news is that if your GI is more expensive than the offers on the first several pages of the search engine results, you will get no takers.