August 15, 2017

Understanding The Cash Value in Final Expense


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For some reason, we’ve been getting a lot of questions lately about how final expense policies generate cash value. We’re going to talk about it today, and as is always the case whenever someone talks about the cash value component of a final expense policy, you are going to be disappointed. If you just want to grab the gist and go, here it is: it’s awful and you’d do well to ignore it.

Listen, technically speaking, final expense policies are whole life policies. And, technically speaking, any whole life policy is going to have some kind of cash value component. And – again, so very technically speaking – if there’s a cash value component then you should be able to access it…

Stop. It’s just not a good idea with final expense policies for three reasons:

1. The premium::benefit ratio is already not great

Final expense policies are not designed for young healthy clients. They’re not even designed for old healthy clients – they’re designed for older clients in poorer health. In other words, they’re designed for clients with a fairly short life expectancy. With most final expense policies, if your client keeps the coverage for 7-10 years the total premiums they pay will equal their death benefit. This is not the mark of a product designed for the long haul. At the risk of being macabre, dying early in a final expense policy is the financially savvy move.

2. The accumulation is absolutely terrible

If your client is paying, say, $750/year in premiums ($62.50/m), they’ll be doing quite well to have $500-$600 of cash value by year five. They may be in the $2k range or so by year 10, but by that point they’ll have nearly paid their death benefit in premiums. Since the accumulation is so low the policy won’t be anywhere close to endowing, so it can continue to be a money sink for as long as your client lives. The moral of the story is starting to appear: if your client is healthy enough to pass underwriting and live another 10 years, go with an underwritten policy. The FE market is not designed for a client with that many birthdays yet to come.

3. Who keeps a FE policy for 10 years?

Final expense lapse rates are huge when compared to other sectors of the industry. If cash-value accumulation is important to your client in any way, a FE policy just puts them between a rock and a hard place: there’s virtually no accumulation in the policy for the first 10-15 years or so, but by that time the amount they’ve paid in will FAR exceed any benefit they could ever recover. Even at the 10-15 year mark the accumulation is pathetic – it’s only when compared to the policy’s early performance that we can say anything favorable about it.

If you’re talking final expense, and your client asks about the cash value, here’s what I recommend:

“This policy does have a very, very small cash value component. If you pay your premiums on time every month for the next five years, it’ll probably have a couple hundred bucks in it. However, taking out all of the cash value can lapse your policy, and that means you’d lose the benefit you would have gotten by paying those premiums on time for so long. If I were you, I’d just pretend this policy didn’t have any cash value at all. Down the line if you want to check and see how much money is in your policy, I’d be more than happy to get that information for you. And if it’s more than we expect at that point, then that’ll be a nice surprise for us. But remember that the real value of this policy is the benefit for your children if something were to happen to you.”

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