Pre-Need Insurance in a Low Interest Environment
Article by: Mr. Tom Hardy – Chairman, President & CEO, Unity Financial Life Insurance Company
By now, practically every funeral home in America has heard from their pre-need insurance representative that it’s hard for the insurance company to make a profit with interest rates at their current levels. Although different words are used, mutual insurance companies need to “make a profit” just like stock companies or they will be unable to grow their capital to support sales.
For most insurance companies, not all products have the same margins and the most difficult product usually is the single premium product. For a single premium sale, the entire premium is received up-front and all of it needs to be invested at today’s rates. Beyond that, not all of the premium is available for investing because there is also an up-front outflow for commissions and premium taxes in addition to other marketing and issue costs. Although other kinds of insurance companies face some of the same dynamics, they don’t have the high first and second year death claims that are typical for pre-need so they have more time to break even.
In this environment, why are the insurance companies not failing? Actually, some are, at least in the pre-need world. Even though the companies generally have not gone bankrupt, we all know several names of companies that have exited the pre-need market in the last few years. The straws that tend to break the camel’s back are either investment losses or high operating expenses. If funeral homes are looking for a long term relationship with an insurance company that will stay in the industry, they should be asking hard questions about how companies compare in terms of unit costs and about how aggressively a company is stretching for investment yield in today’s market. All of this is public knowledge which the insurance companies should be more than willing to share.
One way to look at single premium products is to compare them to funeral trusts. Hardly any trust is able to offer a good yield to a funeral home and they pay no commission. Pre-need insurance growth rates have declined over the last few years but not actually as fast as market yields have declined. A painfully large number of trusts are under water today and unfortunately many funeral homes will lose money. Insurance companies all belong to guarantee associations so funeral homes are paid even when an insurance company fails.
Fortunately, it’s not all negative. Most of the leading pre-need insurance companies made money last year, often because the multi-pay business can help carry the load. Some were able to improve results with reinsurance treaties – that’s obviously not a permanent solution but it can help get through a tough period.
Hopefully, most of today’s pre-need companies will be financially strong for the long run. My advice to funeral home owners is this. Take the time to ask the hard questions about your pre-need insurance company investments and expenses. Don’t quit until you get a clear answer. Don’t allow anyone to cloud the issue with smoke and mirrors. This isn’t rocket science – if a company representative can’t provide you a clear answer, find someone who can.
Tom Hardy Biography
Tom Hardy is Chairman of the Board, President and Chief Executive Officer of Unity Financial Life Insurance Company, Cincinnati, Ohio. He brings over 30 years of senior management experience and financial expertise to Unity. Tom earned his MBA from the Wharton School of Finance. He was Chief Operating Officer (COO) Provident Life and Accident, 1988-1994 and President and Chief Executive Officer, Mayflower National Life, 1995-2000.
