#365 | The Other Whole Life Market

fine looking man in black suit jacket using laptop

Quick Take

By premium, Final Expense is a relatively small part of the life insurance market. But by policy volume, it’s a juggernaut, accounting for nearly 20% of all life insurance policies sold in the United States. What is Final Expense? In contrast to traditional life insurance, Final Expense is oriented around sub-$50,000 face policies with ultra-simplified underwriting on (usually) a non-participating Whole Life chassis. And it’s expensive – but for good reason. Fixed expenses are spread against fewer premium dollars and mortality in Final Expense seems to be atrocious. But beyond that, agent commissions in Final Expense are astronomical. These commissions go to fuel distribution through massive (and massively successful, if social media is to be believed) multi-level organizations built around lead-driven, phone-based, drop-ticket sales. Recently, litigation and complaints have been popping up about these organizations and their sales practices that could have implications for the rest of the life insurance market. But it’s selling by the truckload. Is that a good thing for the industry? The jury is still out.

Full Article

My interest in Integrity Marketing Group started with their acquisition of Lion Street, a company that I’ve known literally since the day it was founded. The formal announcement included a very slick video featuring the founders of Lion Street playing golf and flying in a private jet with the Integrity crew and its famous backer, Steve Young. I started to wonder if there were more videos like that, so I googled around a bit and stumbled on Integrity’s YouTube channel. I’m pretty sure I spent the entire afternoon watching videos for all of Integrity’s acquisitions – excuse me, “partnerships.” I knew a few of the names, but the vast majority were firms I’d never heard of. The way that the founders of were describing their businesses was completely foreign to me, even though many of them said they were in the life insurance business. I was befuddled. The more I watched, the more I wondered – who in the world are these firms and what do they do?

Those videos were my first real introduction to the bizarre world of Final Expense life insurance. Based on what I can tell, there are at least 50 life insurers selling Final Expense life insurance and most of those firms sell almost exclusively Final Expense, which is why folks reading this newsletter have probably never heard of them. The only firms that cross on both sides of the aisle with any real volume are Transamerica, Mutual of Omaha and Corebridge. There are also couple of big names that are not in the traditional life insurance business like Aetna/CVS, Cigna, Aflac and Assurant, all of which seem to see an opportunity in cross-selling Final Expense with their core product lines.

And then there are a whole roster of names that seem straight out of the 1950s, most of which are fraternals or mutuals – Royal Arcanum, ELCO Mutual, Pioneer American, National Slovak, Greek Catholic Union and American Amicable, just to name a few. Some of these firms seem to loom larger in the space than others, particularly National Guardian Life (NGL), Foresters and Great Western. Virtually all of these firms focus exclusively on Final Expense, Preneed (a derivative of Final Expense sold by funeral homes) and Medicare Supplement health insurance.

All in, the Final Expense space is quite a bit bigger than most people reading this would probably think. LIMRA’s Final Expense survey of 22 companies showed $732 million in total premium over 662,000 policies. Given that the survey didn’t include some of the biggest Final Expense insurers, I don’t think it’s a stretch to say that the actual size of the Final Expense market could be well over $1 billion in premium with nearly a million new policies sold per year. Somewhere around 20% of all life insurance policies sold in the United States are Final Expense. The scale of this part of the industry is shocking – especially considering that most people reading this article have probably never really bumped into it.

Final Expense is more of a market description than a product description. Whereas traditional life insurance is sold for income replacement, estate planning and as a tax-advantaged accumulation (and distribution) vehicle, Final Expense is sold for basically one reason – to cover the cost of a funeral. Depending on which source you find, the average cost for a full-service funeral is between $7,000 and $10,000. The pitch to a prospect is that rather than putting the risk of paying for your funeral on your family, you can pay a “low” monthly cost to have life insurance coverage. All you have to do is fill out this quick application and pay your first premium. It’s a simple and straightforward one-meeting sale.

It’s no surprise, then, that the vast majority of FE policy face amounts fall around the $10,000 mark. Most life insurers seem to cap their FE face amount at $35,000 with a minimum of $5,000. Very few traditional insurers have products with minimum face amounts below $50,000 and most set the minimum face amount at $100,000. As a result, there is very little crossover between traditional life insurance and Final Expense. Products designed for Final Expense rarely have the ability for large face amounts and traditional products rarely have the ability to illustrate tiny death benefits.

One of the key reasons why Final Expense policies don’t travel upstream and traditional life insurance doesn’t travel downstream is underwriting. Some companies in the FE market seem to offer a fully underwritten version, but the vast majority of underwriting is ultra-simplified. From what I can tell, most companies set up their applications with a progression of knock-out questions. If an applicant can make it to the end without selecting “yes” for any of the conditions, then they qualify as Level, which means that they have the lowest cost of coverage and are covered immediately. If they can’t, then they’ll qualify for either Graded or Modified, depending on how far in the application they can get. The cost of coverage in these rate classes is obviously higher and the full death benefit isn’t available until the 2nd year except in the case of an accidental death. A handful of companies also offer pure Guaranteed Issue with a 2 year waiting period to receive the full death benefit.

I would argue that these are the two defining characteristics of Final Expense – ultra-simplified underwriting and tiny face amounts. Theoretically, any product that fits those two criteria could be sold in the Final Expense market. However, the vast majority of Final Expense products are non-participating Whole Life. Quoting Final Expense reminds me of the ratebooks that my granddad told me about from the days before illustrations. Because the death benefit and cash values are guaranteed, the only point of comparison is the premium, which can be quoted as a cost per unit of coverage. It’s the simplest possible permanent product solution.

I signed up for a Final Expense quoting engine that gave me immediate access to quotes from 45 life insurers so that I could get a feel for pricing on FE policies. The average cost of coverage for a $10,000 policy on a 65 year old is about $730. For those of you doing quick math, a $730 average annualized cost means that the policyholder has just 13 years (age 78) before total premiums exceed the death benefit. For a 75 year old with an average annualized cost of $1,328, premiums exceed death benefit after just 7 years. Even for a 55 year old, premiums exceed death benefit after 20 years, putting the break-even at just age 76.

No matter what way you cut it, Final Expense is expensive. With any reasonable expectation of Life Expectancy, just putting the monthly premiums aside in a money market account would yield a better result for the vast majority of clients. Better yet, a policyholder would be better off spending a bit more to buy a participating Whole Life policy at the minimum face amount. MassMutual’s minimum face amount for its L100 products is $25,000, which allows for a comparison between their product and the Final Expense market.

At Age 65, MassMutual slots at #13 among 40ish final expense insurers, between Assurant and Royal Arcanum but far behind juggernaut* Sons of Norway, which is the cheapest in this cell. The difference between MassMutual and almost everyone else on the list, though, is the fact that MassMutual actually pays substantial dividends. At year 14, MassMutual currently illustrates a death benefit of $35,302 versus a level $25,000 in Final Expense. It’s not great, but it’s a heck of a lot better than a Final Expense policy in that the cumulative premiums never meet or exceed the death benefit.

Among those 40 insurers, there is quite a bit more price variation in Final Expense than you might expect given the fact that it is a standardized, commoditized product. In the example above, Sons of Norway is priced at $1,315 annually and the most expensive product from Bankers Fidelity is nearly double the price at $2,475. The same sort of price differential exists at other age and face amounts as well. Clearly, there is a huge amount of discretion built into the price of a Final Expense policy.

To get a feel for the size of the discretionary pricing element, I ran a Whole Life pricing model using 2017 CSO mortality and a 3.75% guaranteed interest rate** to get the price of a “base” Whole Life chassis without any expense load applied to the premium. The base annual premium for a $10,000 Whole Life policy is $345 for a 65 year old Male. The economics of this “base” policy are not terrible. Premiums don’t exceed the death benefit until age 94, well past table-based life expectancy. I think you could make the argument that this sort of “base” Whole Life policy actually does make sense, economically, for Final Expense coverage.

The problem is that the “base” policy isn’t available. Instead, the average price across 61 Final Expense products for a 65 year old Male is $730, a little more than double the “base” price. In other words, less than half of the premium in an average Final Expense policy is due to the core 2017 CSO mortality and guaranteed interest rate. The rest is expenses. And considering that these are non-participating policies, those expenses are real and incurred, not refunded over time through a participating dividend.

There are some clear reasons why expenses in Final Expenses policies are so high compared to other forms of life insurance. One is pure policy administration. It costs a certain amount of money to administer a life insurance policy. Universal Life policy administration fees tend to range from $60 to $240 per year. That cost is immaterial on a $10 million policy with a premium of a few hundred thousand dollars, but it’s absolutely material on a $10,000 policy with a premium of a few hundred dollars. Corporate overhead expenses have to be spread out over relatively small premium dollars. Final Expense is also a relatively capital-intensive product. Every dollar of capital has to be paid back plus interest and the only place that repayment can show up is higher premium.

It’s also highly likely that what I’m capturing as “expenses” is simply actual mortality in excess of 2017 CSO, which is the table I used to price the theoretical “base” Whole Life product. In looking over the financial statements for three major Final Expense writers, mortality in Final Expense Whole Life seems really high. For example, I looked at 3 companies where FE is the entirety of the Whole Life block and the average death benefit payout as a percentage of total premium was 85%. As a percentage of reserves, death benefits averaged nearly 12%. To put those figures into context, Northwestern’s death benefits as a percentage of premium is 33% and just 2.29% as a percentage of reserves.

Based on that data and a couple of conversations with folks familiar with the Final Expense space, it seems as though absolutely atrocious mortality is at least partially to blame for the high cost of Final Expense policies. And, of course, the more expensive the policy, the more atrocious the mortality because of anti-selection. For clients who are willing to go through traditional underwriting, there is no doubt that there are cheaper and better options available than Final Expense policies.

But I don’t think that overhead expenses and excess mortality tell the whole story. There’s another factor to consider – agent compensation. Typical compensation for a Whole Life policy for brand new insurance agents is in the 50-60% range, depending on the distribution system. For Final Expense, compensation starts for fresh agents starts at 90% and goes up from there. As with traditional life insurance, new agents are almost always aligned with a larger organization. In traditional life insurance, we call them General Agents. In Final Expense, they’re called IMOs***. Both organizations have layers of management that also receive compensation on the sale. The difference, however, is in the goals of the organizations.

For General Agents at traditional insurers, at least the good ones, the goal is to recruit agents that stick around and grow their businesses by incorporating insurance into holistic financial planning. That’s where all of the big mutual companies are going with their field forces. Final Expense IMOs have a very different goal. They want agents to pound the phones, repeat the script, get the meeting and close the sale – and to recruit as many other agents as possible into the system as “downlines.” Over time, a successful agent transitions from actually selling life insurance to recruiting hoards of agents who sell life insurance and themselves recruit other agents. Most IMOs are organized around a classic multi-level/network marketing structure.

There is plenty of commission to percolate through all of the layers. From what I understand, most top Final Expense companies pay around 170% in total compensation to IMOs and the percentage applies to the full base premium of the Whole Life policy, which is substantially higher than a comparable Target premium on, say, an Indexed UL policy. In exchange for keeping 40-80% of the premium on each sale, IMOs provide a few key services to agents – training, support, scripts, technology and, crucially, high-quality leads.

Leads are the lifeblood of the Final Expense business. Without leads, agents have no one to call. The mantra at most of the major IMOs seems to be, basically, that with enough determination and enough leads, anyone can make $250,000 a year selling Final Expense. You can’t buy determination, but you can buy leads. In fact, you have to buy leads. Some IMOs recommend buying $1,500 worth of leads every week. On average, they cost around $20 to $25 per lead, so $1,000 gets you 50ish leads. As an ambitious Final Expense agent, you need to spend a lot of money to make a lot of money. But part of the value proposition of the IMO is that the leads are “fresh,” meaning that they have just been generated, are exclusive to the IMO and the client has actually expressed interest.

There has been no small bit of controversy (and litigation) in the Final Expense industry over accusations that IMOs are selling the leads for profit and that the leads are not “fresh.” Some litigation has claimed that IMOs are actually constantly reselling the same leads to new agents, which means the prospects are bombarded with calls to the point where other lawsuits have started cropping up about Final Expense IMOs ignoring the Do Not Call list. Some litigation even goes so far as to say that selling bad leads and churning policies is the fundamental business model of some Final Expense IMOs.

Then there is the question of who exactly is buying these Final Expense policies. I spent more than my fair share of time perusing the internet looking at Final Expense websites and came across a pretty interesting series where agents bought leads and then did “live-dials” where they actually call the clients while they livestream it to YouTube so that folks can see Final Expense sales in action. It is immediately clear that these “leads” are to prospects who are, generally, low income and old. It is weird and somewhat disturbing to watch a young, clean-cut, smart and very hungry agent sweet talk a never-ending list of grandmas and grandpas into meetings to discuss Final Expense insurance using the exact same script and tone every time. One prospect gave her address as a room number at a Motel 6 and the agent, undeterred, took her information and set up the meeting. It was a jaw-dropping moment. Some of it is pretty gut wrenching to watch.

I have no doubt that some policyholders benefit from Final Expense coverage, especially considering the death benefit payouts on Final Expense lines of business, but it seems to me that the chief beneficiary of Final Expense is not the policyholder or even the insurer – it’s the agents and uplines who, according to their social media posts, are making millions of dollars selling Final Expense. That is the fundamental allure of the business. Whereas traditional career agencies and even some other network marketing firms are busy trying to transition insurance agents into holistic financial planners, Final Expense is pure, unadulterated, boiler-room, script-driven salesmanship on a colossal scale.

Consider the fact that for tens of thousands of agents and millions of policyholders, their entire experience with life insurance is through the lens of Final Expense. The reality is that in terms of policies sold and agents recruited, networking marketing groups, most of which are focused on Final Expense, are by far the fastest growing and soon to be largest single part of the life insurance industry. To the extent that there are agent disputes, consumer complaints and litigation regarding Final Expense, there will be spillover effects into all life insurance markets. There is no licensure distinction between an insurance agent dialing leads to sell Final Expense and an insurance agent selling $10 million policies for estate planning.

For years, industry groups and some insurers have been clamoring for life insurance to be more oriented towards the middle-market and to get back to its roots of providing protection for families rather than focusing on high-end protection and accumulation sales. The typical playbook for expanding into the middle-market has been some sort of Direct-to-Consumer model for Term insurance or partnerships with other financial wellness organizations, both of which are geared towards reaching younger, more digital-forward customers. Like Final Expense, those strategies fundamentally feed off of quality leads. But unlike Final Expense, the economics of selling a small face Term policy to a 20 year old won’t even pay for the cost of the lead, which is why many of these tech-forward startup insurance distributors have hit some serious headwinds****. The great irony is that the life insurance industry arguably is closing a coverage gap with Final Expense, just not the one that everyone talks about – and maybe not even one that actually needs to be closed.

*Just kidding.

**I pulled 10+ forms for these policies and all of them were at 3.75%, so I feel comfortable extending that to the broader market

***Not to be confused with annuity-oriented IMOs. IMOs in Final Expense are basically multi-level/network marketing firms. Annuity IMOs, at least the good ones, are full-service financial sales firms that work directly with independent advisors and agents. There is no upline/downline in a traditional annuity IMO.

****It’s been all downhill for these firms since 2021. Prudential has written off hundreds of millions of dollars on its acquisition of Assurance IQ. PolicyGenius scuttled plans for an IPO and recently sold to Zinnia. SelectQuote stock has dropped 95% since its peak. Funny enough, some Final Expense IMOs are apparently teaming up with some of these D2C Term distributors that are trying to pivot to agent-assisted sales. The two worlds are starting to come together.