A paradigm shift for final expense

The only thing constant is change, as witnessed through our changing clients, their changing needs, and an industry full of product and policy change. The baby boomer generation has been the driving force behind insurance companies creating new products to meet boomers’ unique needs and desires. The same is true with products available for final expenses, such as the irrevocable funeral trust. This semi-hybrid between a final expense insurance policy and a pre-need funeral insurance policy provides advisors and agents with a new and important tool for their financial toolbox.

When most advisors and agents consider final expense, they think of the traditional final expense product where the agent sells a small life insurance policy of about $10,000 to $25,000 to cover a client’s final expense, particularly funeral and burial costs. These whole-life insurance policies usually require the insured to pay a premium for the remainder of his or her life. Traditionally, whole-life insurance policies have appealed to clients with a low net worth who find the payment affordable and whose family would need assistance with these extra expenses.

Many advisors avoid this process because it is too cumbersome for such a small reward, or because it may divert their client’s focus from the big picture. And of course, if you assume higher net-worth clients may not be interested, why bring it up?

In 2002, change came to the final expense playing field when a revolutionary product, the irrevocable funeral trust, was introduced into the marketplace. Since then it has experienced some minor changes and improvements; however, despite the effectiveness and client receptiveness, it is still widely underused by agents and advisors. Oddly enough, this underused final expense product has gained momentum among a public who are demanding alternative planning solutions from their agents and advisors. Yet it’s the middle class and high-net-worth clients who seem to be ideal candidates, although the less-affluent purchaser can benefit from this new irrevocable funeral trust as well.

I began selling insurance in the early ’90s, predominately pre-need insurance with funeral homes. The product’s purpose was to cover final expenses, but also protect against inflation. If my client required nursing home care or public assistance, they could keep the policy, as it was not a countable asset in the spend-down. The main problem with pre-need insurance is that it is only available through the funeral home of the client’s choice.

The traditional final expense product had a few areas that always seemed to be a stumbling block for the client as well. First, the face value of the traditional final expense policies had to be increased every eight to 10 years to adjust for inflation. This could only be done by purchasing another small policy. Many people who owned the traditional product had two, three and sometimes four additional policies just to stay ahead of inflation.

Second, if the client needed nursing home care, and had to spend down assets to qualify, the policy cash value was a countable asset, as far as Medicaid was concerned. The policy had to be cashed in, leaving the client with no final expense coverage.

Once the final expense was cashed in due to nursing home spend-down, case workers would tell the traditional product owner to take the small amount of cash value and purchase a funeral plan. Consequently, the life insurance was gone and the client had to start over.