Who Is Your Preneed Partner And Why?
Monday, August 29, 2011
In the last 12 months, our interest rate environment has been a topic under great scrutiny. FDLIC's CEO, Kris Seale wrote an article in April entitled, "What's the 'Low Down' on Interest Rates?" which discussed the extent and rationale behind the 10-year U.S. Treasury Bond fluctuations. Six months prior to that Mr. Seale wrote another article titled, "What's Up With Interest Rates?" addressing how interest rates were approaching all-time lows and how all Americans were having to adjust to these times often being referred to as the "new normal." Needless to say, since the financial crisis of 2008, there has been a great deal of volatility and uncertainty with not only the financial markets, but with the interest rate environment as well.
And just as things appeared to be stabilizing, maybe even getting a little better, we have the market turmoil experienced the week of August 8th. I was enjoying some windshield time while listening to the news of the day on the radio. A financial news channel was discussing how the U.S. narrowly avoided defaulting on debt and raised the debt ceiling. The broadcaster said, "The wrestling match is over--at least temporarily" and in the midst of it all the stock market fluctuated wildly.
During my three hour drive that afternoon markets made a brief up-tick after The U.S. Federal Reserve made a much anticipated statement, but ultimately, the moment of optimism was short lived and Wall Street had its worst day since the 2008 financial crisis with the Dow Jones industrial average dropping 635 points as fearful investors reacted to the United States losing its coveted AAA credit rating. Selfishly, I have to admit my initial thoughts surrounded my own retirement. Fortunately I have years to recover from this market turmoil; and my years until retirement have simply been extended--but that's another story.
My second thought went toward FDLIC, our funeral home customers and the families they serve. Do our funeral home clients wonder, "What does all this turmoil in the financial markets mean to preneed funds?" And with three more preneed carriers merging or exiting the market just this year are funeral homes wondering, "When it comes time to pay the claim will the funds be there?" And, "Will the growth that was provided when I wrote the policy still continue?" Fortunately, FDLIC holds no publicly traded stocks so these wild fluctuations in the stock market are not what impacts our investment portfolio. FDLIC's portfolio is based on the 10-year U.S. Treasury. Why? We follow the 10-year Treasury for two reasons. First, FDLIC's average life insurance policy remains in-force for almost 10 years--10 years is about the average time we get to invest the money before we have to pay a death claim. Second, FDLIC primarily invests in A-rated or better corporate bonds, and corporate bonds are priced based on a spread over the 10-year U.S. Treasury Bond. So, the 10-year Treasury is the benchmark that truly matters.
Let's get back to the question of your preneed partner being able to pay the claim when the time comes, the market impact on your prearranged funds, and the growth being paid consistently over the years of the policy. These are VERY IMPORTANT questions you should be asking yourself and you should be certain the answer to the above questions is unequivocally YES! Too often I hear funeral homes not doing their "due diligence" when it comes to their chosen preneed partner. Understandably, most if not all funeral home owners have a lot of responsibilities, and selecting the best preneed partner is simply not as high on their list of priorities as say...taking care of that death call they just received. So, to keep it simple I want to provide some quick tips on selecting a preneed partner.
- High A.M. Best rating. An A.M. Best rating of A- "Excellent" or better is an absolute must. A.M. Best ratings reflect the opinion of an independent, third-party organization on the insurer's ability to meet policyholder obligations. Nothing is more important than an insurance company's ability to honor its promises. Unrated or low rated companies should be viewed with a suspicious eye.
- Adequate Capital and Surplus to Total Assets Ratio. The ratio of Capital and Surplus to Total Assets is a key indicator of the financial health of an insurance company. You should look for a ratio that falls in between 8% and 10%. A low ratio can indicate a lack of Capital and too high of a ratio could indicate a company that is not growing its premium income.
- Conservative Investment Mix. Look for a company that has a high percentage of bonds in their investment portfolio. A minimum of 80% bonds is recommended. Also, look for companies who hold 100% investment grade bonds. Investment grade bonds are referred to as Class 1 and Class 2 bonds. Class 3 and below are considered non-investment grade bonds which are commonly called "Junk" bonds. Class 6 bonds are in default. Finally, be cautious if an insurance company invests heavily in the stock market. As we've seen in recent years and even recent weeks the stock market can shift dramatically.
- Commitment to the Funeral Industry. Choose a company that has shown over the course of time to be a champion of the funeral industry and that has shown itself to be a proven funeral industry partner.
- Product. When considering products, it's helpful to visualize the five elements of product design as a pie. The slices of the pie are growth, commissions, premiums, value-added services, and company profit. Look for a company that provides a well-balanced offering. And because of the uniqueness of each customer, look for a company that has product options that allow you to pick how the wedges of the pie are distributed in a manner that best meets your needs. One final point on product design: If the product provides benefits that are outside of the industry norm, heed your father's advice: "If it's too good to be true, it probably is!" Preneed insurance companies need to invest their reserves in the same environment and as we've seen, an unusually strong benefit(s) as compared to the market could result in company's failure to deliver on its promises.
- Marketing. It goes without saying that every funeral home owner wants their business to grow. That's why it's important to locate a company that has an active marketing department--one that has made the commitment to provide your firm with ideas and support. A real plus would be to find a company whose marketing department is in step with its sales department, so that the synergy necessary for specific ideas and solutions will exist. Every firm is as different as the markets they serve. Rather than taking a "shotgun approach" with your marketing program--trying different things while hoping you will discover something that works--consider how committed the company is to providing you with proven solutions, specific for your community-centered marketing efforts.
Friends, these are indeed challenging times on many fronts. There are a lot things happening within the profession that demand your time and attention; mercury, dry ice and health care costs just to name a few. While choosing your preneed partner may not be at the top of your priority list, I hope after reading this article the importance you place on selecting your preneed partner will be elevated. By understanding how critical this decision is and by utilizing the six attributes listed above you can make an informed, well-thought-out decision.