Death Care Law Blog : Kansas Death Care and Preneed Lawyer & Attorney : Stalter Legal Services Law Firm : Funeral Law, Elder Law : Kansas City

Every funeral director has faced the situation where Mrs. Smith comes in with an insurance policy and her funeral plans. Often, Mrs. Smith has gone to trouble of designating the funeral home as the policy beneficiary before having discussed her plans with the director. Often funeral directors file the policy and plan away until Mrs. Smith’s time of need. Frequently, the file includes nothing more than Mrs. Smith’s policy and funeral preferences, and this is troubling for Missouri’s new preneed audit staff.

Although Missouri’s preneed reforms went into effect more than 2 years ago, the new examination process has gotten off to a slow start. The first hurdle was funding. The new law imposed a $36 per preneed contract fee. New licensing fees were also imposed. However, these fees were tied to annual reports and renewals that were not due until October 31, 2010.

The Division of Professional Registration has also had the task of hiring preneed examiners and establishing audit guidelines. Defining those audit guidelines has proven difficult due to fact Missouri has hundreds of funeral home sellers that have been operating with little regulatory input or oversight for 25 years. Consequently, every single examination poses its own unique issues. But the one issue that must be surfacing with regularity is Mrs. Smith and her insurance policy.

After ‘practicing’ on the State Board’s industry members, the examinations began in earnest this past summer. By the Board’s September meeting, Mrs. Smith and her insurance policy were on the agenda. The staff floated a proposed regulation regarding a definition of preneed that would trigger Chapter 436 reporting requirements when Mrs. Smith walked through the funeral home’s door. Once the funeral director was put on notice of the insurance beneficiary designation, he must either report it or take action to reverse the designation.

The staff’s reasoning is that a contract has formed when the funeral director is put on notice of the policy designation. That contract is for a funeral arrangement that is not immediately needed, and therefore falls within the definition set out in Section 436.504(7). The staff further argues that this interpretation is needed to protect the consumer when the only evidence of the contract that exists was a ‘handshake’. While the staff has a point regarding the risks of the handshake, this transaction falls outside the legislative intent of SB1.

SB1 regulates the industry’s ‘sale’ of preneed contracts where consumer funds are paid to the funeral home or cemetery. The law’s intent is to make sure the preneed seller deposits those funds to trust or a joint account, or pays them to an insurance company. In contrast, Mrs. Smith may have purchased her Prudential Life policy from the same agent who sold her car and home insurance.

But, the staff’s concerns are not without merit. If Mrs. Smith’s children do not know of either the insurance policy or the handshake with the funeral director, they may go to another funeral home. The staff also asks what it is to stop the funeral director from retaining the insurance proceeds when the family has gone to a competitor.

To ensure Mrs. Smith’s wishes are fulfilled, the funeral home should document the policy designation with a written contract (which provides for a return of the proceeds if a different funeral home is used). The contract should also spell out the promises with regard to prices.

However, Missouri consumers would be better served if SB1 fees were spent towards audit procedures that focus on preneed sales, and not Mrs. Smith and her insurance policy. Missouri’s Chapter 333 provides the State Board with authority to implement additional protections when the funeral director accepts an insurance policy in exchange for a handshake.

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Our preneed provides peace of mind by freeing your family from the burdens of rising funeral costs and from making difficult decisions during their time of grief.

Since the inception of the transaction sixty years ago, that statement has defined preneed marketing. Even the AARP recently embrace the peace of mind concept. The inflationary protection that can be provided by preneed is the product of the guaranteed contract through which, funeral homes assumes the risks of investment returns and cost increases. But unless today’s consumer can afford to pay for that guaranteed preneed contract with a lump sum payment, the most popular form of preneed funding is forcing many families to choose cremation.

In 1988, insurance moved to the forefront of preneed funding by virtue of a tax ruling adverse to preneed trusts. While insurance was already a major player in the preneed industry, insurance companies had followed the lead of the early preneed pioneers by crafting a product to be used with the guaranteed contract. In the twenty years that followed the tax ruling, preneed insurers built sophisticated programs around their guaranteed contract policies. To win the funeral home’s business the insurance product must provide a commission (to pay preneed program expenses), an increasing death benefit (to offset the increase in costs to service the contract), preneed contract forms and regulatory reporting. The costs of these features are most apparent in the pricing of installment premiums.

Using costs discussed in our prior post, assume a husband and wife (age 67) want to purchase average funerals, opening and closing services and a grave marker. The total costs are approximately $20,000.00. That is a hefty sum for a couple on a fixed income.

The premium rates charged by preneed insurers vary due to factors such as the funeral home’s volume of business written, the commission rates sought by the funeral home, the age and health of the consumer, the term of installments, and the method of invoicing. For purposes of this post, we averaged two of the leading preneed insurer’s premium rates and assumed premium invoices would be mailed to the consumer. The attached chart reflects the monthly premiums for installments over 3 years, 5 years and 10 years. The chart also reflects the total cost of the premiums to the couple.

Most elderly consumers would be hard pressed to make monthly payments of $330, let alone $740. And if the couple elects the 10-year installment plan, the total cost of the original $20,000 package almost doubles. Not much of a cost savings.

Like most consumers, the preneed buyer will begin to ask what can I purchase with $80 (or even a $100) a month. The resulting death benefit will be about enough for two cremations.

If the industry wants to keep the traditional funeral affordable, more flexibility is needed in the funding of preneed. The price guarantee (and the purchase of insurance) may have to be deferred until the consumer (or funeral home) can afford it.

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To provide a prospective of the cost on one’s final arrangements, consumer groups advise the public that the cost of a funeral could be the third most expensive purchase made during their lifetime (behind the purchases of a house and a car). In doing so, the consumer group often sites the average funeral cost figures provided by funeral trade organizations. These averages typically do not include the costs associated with purchasing burial spaces, monuments and burial services. Because cemeteries are not subject to the FTC’s Funeral Rule, there are no general price lists from which to gather information for cost comparisons.

For year 2009, the NFDA reported the average cost of a funeral (with a vault) to be $7,755. If the funeral costs have tracked the national cost of living increases, the 2011 average cost should be close to $8000. The traditional funeral and burial is not complete without the burial space, a marker and interment services. A Google search for average burial costs doesn’t produce many 'current' hits.  One of those Google hits is a 2005 Forbes article, that reported the average burial space cost to be $4,000.

Burial spaces can vary greatly in cost depending on the type of cemetery and the type of burial space. Municipal cemeteries will have some of the lower prices (courtesy of the tax subsidies), and religious cemeteries tend to have some of the higher prices. Prices vary greatly depending on whether the interment is to be made in a ground space, a companion space, a lawn crypt or a mausoleum.

The Forbes $4,000 burial space price seems a bit high, and for the purposes of this article, we will assume the cost of companion spaces to be $4,000 (a family’s first funeral purchase is typically for dad, and spaces are purchased as companions so mom can be assured to have her place next to dad).

Many cemeteries require endowed care contributions that often are in addition to the cost of the burial spaces, so assume an endowed care contribution of 15% or $600.

The cemetery will also charge for the services of opening the grave, installing the vault, and then closing the grave when the interment is completed. It is not uncommon for an opening and closing to cost $1,500 to $2,000.

And there is the cost of the marker or monument. Assume a granite companion upright monument is chosen. The averages differ, but a cost of $2000 is quite reasonable.

For the average family, the surviving wife faces an ‘average’ cost of $16,000 when her husband dies. When one scans the automotive ads, you will find at least a few new car models that cost less than a funeral and burial. The ad I’m reviewing also offers financing for 72 months. In contrast, funeral homes and cemeteries expect payment in full within weeks of providing their property, goods and services.

Even when insurance proceeds will be available to pay the funeral and burial, it may be months before proceeds are received. If there is no life insurance, the cost may be too high to use a credit card. While the family may prefer the traditional funeral and burial, the cost, and its immediate payment, can be too high.

For those families that do not choose cremation, the lack of flexible financing is leading to increasing receivable issues for death care operators. Trade magazines are reporting that the receivables carried by operators are growing in terms of amount and defaults. So, even when the family opts for the traditional funeral and burial, the operator is seeing an increasing number of those families failing to pay.

The historic advice has been to get as large a down payment as possible, and then stay diligent on follow-ups with the family for payment. Death care operators are now being advised to help the family not reach beyond their means. Apparently, this is still not enough. It is time for the death care industry to consider installment payments (and, not only in terms of at-need services).
 

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Here in the Midwest, the death care industry is just beginning to experience the increase in preneed reporting and oversight. Some funeral directors are already frustrated with the new requirements, and are biding the time to when they can vent towards the preneed regulator.

Over the past 4 years, state agencies in Illinois, Kansas and Missouri were made to account for their roles in the failures of preneed programs. The replies were very similar: an outdated law tied our hands. There was some truth to those excuses, and state legislatures responded with laws that provide the regulators greater oversight authorities, including expanded examination powers. What rankles funeral directors is that the examinations are aimed at individual operators who had nothing to do with master program collapses.

With the preneed sale originating at the funeral home or cemetery, the on-site examination is a necessary component to effective oversight. However, state regulators struggle with how to conduct an effective preneed examination program. Limited budgets are also requiring the examination process to be efficient.

Illinois stands out from the other two states in that it had audit and reporting procedures in place before its crisis arose. Illinois funeral homes have given diverging descriptions of their audit experiences. Some reported having regular audits, while others report they had never been audited. To better understand the Illinois procedures, I requested a copy of the Comptroller’s examination guidelines. That request was declined with an explanation that such a disclosure may make it easier for funeral homes to circumvent the audit process.

The Illinois audit process failed both the industry and the consumer because the trust procedures contemplate depository funding and relied too heavily upon the tax cost basis of the preneed trust fund. The examination did not incorporate procedures regarding the qualifications of the depository/trustee, the investment of the funds or the fees charged to the funds. A recent conversation with an Illinois examiner suggests that the Comptroller continues to follow the old audit procedures despite their deficiencies.

In contrast, the staff for the Missouri State Board of Embalmers and Funeral Directors has been giving a lot of thought to how the on-site audit should be conducted. Prior to the collapse of National Prearranged Services, the State Board had minimal preneed reporting and examination powers. The examinations conducted this year are the first in 20 years, and recent regulation proposals provide a clue to what concerns the State Board staff have from those initial exams (isolated insurance policies, old contracts, etc).

While the State Board tabled the staff concerns for future discussion, those issues will continue to be reflected in the procedures followed by examiners (and by the preneed seller reports submitted to the State Board). For Missouri preneed sellers, the situation may only add to their frustration. First, there is the uncertainty of what to expect when the examination is conducted. And then, there are the issues raised by the examiner regarding practices that funeral directors may have been following for years.

There is not much that can be done about the frustration that stems from the evolving examination process. The preneed transaction is changing, and regulators will have to adapt their exam procedures accordingly. But the State Board will serve an important role in keeping the examination process focused on the crucial issues. That focus will be defined by the exchange that occurs between the staff and the Board over specific audit findings. These exchanges serve to educate the staff and examiners on the business of the death care industry, which should improve the efficiency of preneed oversight.

As other Midwest states initiate new preneed examination procedures, their regulators must find different ways to ‘learn the business’. Pursuing the wrong issues will only waste precious resources and alienate funeral homes and cemeteries.
 

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The funeral industry may grumble about the FTC’s Funeral Rule, but two disclosures required by that law play important roles in the preneed transaction. The general price list is often used by funeral homes as a tool for comparing prices with the competition. And when a prearranged funeral is performed, the statement of goods and services can be used to demonstrate the savings a family received by virtue of the preneed contract’s price protections.

Consumer advocates also utilize the general price list as a tool to educate the public on funeral costs. Periodic price surveys are facilitated by the Funeral Rule requirements. In an effort to expand its information base, the Kansas City chapter of the Funeral Consumer Alliance recently made a request of the metropolitan area’s cemeteries. However, a significant number of the cemeteries did not respond.

While some cemeteries may have been challenged to respond due to staffing issues or a lack of resources, there were non-respondents who were not comfortable making a public disclosure of what they charge. These types of disclosures are at The Bereaved Consumers Bill of Rights Act. Cemeteries are not subject to the Funeral Rule disclosure requirements, and the bill sponsored by Illinois Representative Bobby Rush would change that.

Representative Rush’s bill is a product of the Burr Oak cemetery tragedy, which had little to do with disclosures about the costs of cemetery property, merchandise and services. Regardless, the Burr Oak circumstances have been used to justify legislation for an expansion of the Funeral Rule to the cemetery industry. The cemetery industry has strongly opposed the legislation, citing that the penalties far outweigh the benefits to the consumers. Funeral trade groups have generally endorsed the bill. The funeral industry’s reasoning can be simply stated as what is good for the goose is good for the gander.

The cemetery industry’s objections to the expansion of the Funeral Rule have merit. Fines for technical violations are substantial, and could be devastating to smaller cemeteries. And, Federal enforcement of the Funeral Rule has been spotty at best.

But just as the KC branch of the Funeral Consumer Alliance has found out, gathering pricing information about cemeteries is difficult to do in the absence of the general price list requirement. The ICCFA posted model recommendations more than 13 years ago, but cemeteries have been slow to embrace them. Many cemeteries have also been slow to implement preneed sales programs. Economic survival dictates that cemeteries become more proactive regarding preneed. With that move will come the need for the disclosures required by the Funeral Rule.

The Kansas City chapter of the FCA will hold its annual Day of the Dead meeting to discuss the results of its cemetery price survey, and to press similar issues with this author. To download the KC FCA newsletter (and cemetery survey results) click here.
 

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The licenses required to sell or service preneed in Missouri must be renewed annually, with the deadline for filing the required paperwork falling on October 31st. Technically, these licenses expire on Halloween unless the State Board staff has renewed them by that date. But, it is human nature to procrastinate, and many licensees wait until the final days to file their paperwork. With 545 licensed providers, 331 licensed sellers and 179 licensed preneed agents, the deadline paperwork handled by the State Board staff is substantial.

Regulation proposals discussed at the State Board’s September meetings underscore the frustrations the staff have with the licensing deadlines and the paperwork submitted by licensees. The proposals would add pressure to licensees having renewal paperwork filed weeks (instead of days) prior to Halloween (so that the staff would have more time to review the paperwork before renewing the license).

The ‘rub’ for the State Board staff is that SB1 sets Halloween as both the deadline for filing paperwork and the expiration date of the licenses. The law fails to provide a window for the administrative review of paperwork. Before dismissing this as the staff’s problem, sellers should consider that SB1 also allows a consumer to void his/her preneed contract if the seller did not have a license when the contract was sold.

The problem for the staff is that a number of sellers are submitting renewal reports that have not properly completed. Sellers who only use one form of funding are omitting the schedules for the funding vehicles they do not use. The renewal forms also require a summary of all contracts sold during the reporting period. If the summary is left blank, the staff has no way of knowing whether the fee accompanying the renewal is correct.

For the most part, the current renewal report form is the same as last year’s. However, sellers that use joint account funding need to recognize the report has a new Section M that requires information about the preneed contracts sold prior to the current reporting period. If the seller waits until October 31st to file the renewal, and omits the Section M report in error, the State Board letter received in November will seem like a late Halloween trick.
 

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Earlier this week, the Missouri State Board of Embalmers and Funeral Directors posted their agenda for the September 27-29th meetings, which includes 65 pages of regulation proposals or revisions. The Board has probably heard the same complaint that we have: what the industry needs is less regulation, not more. However, regulations can serve a useful purpose in clarifying ambiguities in applicable law (and Senate Bill No. 1, and this past year’s SB 340 have their share of ambiguities and conflicts).

While most of proposed regulations involve death care licensing issues, the proposals do include some preneed issues. One of those issues is the exemption of cemeteries from Chapter 436 and another is the relationship (or non-relationship) between the preneed seller and the trust investment advisor. Both issues have been addressed in earlier posts to this blog. The debate continues.

The Board’s agenda also includes a modest legislative agenda. Well, modest but slightly controversial. The Board’s decision to raise the trusting requirement from 85% to 100% remains the main proposal.
 

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As discussed in prior posts, the Missouri preneed audit process begins with a notice to the preneed seller for the production of documents and data. After a review is made of the documents, data and the annual reports filed with the State Board, an on-site examination is scheduled with the seller. Most Missouri preneed sellers are unsure of what to expect. To an extent, Missouri has borrowed from the Texas Department of Banking examination manual in developing preneed audit procedures. However, Texas has the benefit of years of reporting and exams. Missouri is playing catch up, and the desk audit of the seller’s documents, data and annual reports are the State Board’s first in depth look at how funeral homes have structured their preneed programs.

SB1 made substantial changes to Missouri’s trusting requirements, and one purpose for the desk audit is to determine if the seller’s preneed contract form and trust agreement are compliant. But, the desk audit will also be used to match trustee reports to outstanding contracts, and determine whether the proper funding has been maintained.

For the State Board examiners, the first look at a seller’s records includes all outstanding preneed contracts. Missouri’s first preneed law was written in 1965, and some funeral homes have contracts dating back that far. Consequently, the initial desk audit could be a lengthy process for Missouri’s larger funeral operators.
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A few weeks ago, we wrote on the approach being taken by regulators of posting discipline proceedings on their website.  The purpose of the posting is to inform consumers of such issues so that they can make additional inquiries.   The concept is now a reality for the Missouri State Board of Embalmers and Funeral Directors.    

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