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

Who can honestly say they saw this one coming?

 On July 5, 2012, the Missouri State Board of Embalmers and Funeral Directors filed a complaint with the Missouri Administrative Hearing Commission against a Missouri funeral home for alleged violations of Chapter 436, including several transactions that predate Senate Bill No. 1. So, three years after the passage of Senate Bill No. 1, the State Board has initiated its first formal proceeding against a preneed seller.  SB1 armed the State Board with several new tools, including the preneed financial examination.   Pointing to the massive fraud committed by National Prearranged Services, the State’s regulators convinced the Missouri Legislature that such tools were necessary to protect the consumer.  What misconduct did the new financial examination tool uncover that warranted a formal complaint: the funeral home failed to report, and adequately document, insurance assignments and beneficiary designations.

The crux of the State Board‘s argument is stated in Paragraphs 49 and 50 of the Complaint:

49.       A preneed contract is sold when a seller accepts an insurance assignment or is named as owner (prior to August 28, 2009) or beneficiary of a life insurance policy pursuant to an arrangement between the seller and the consumer to ensure payment for the final disposition of the consumer's dead human body and for funeral or burial services, facilities or merchandise upon the death of the consumer.

50.       ******  Funeral sold and entered into preneed contracts with those consumers specified in Exhibit A when ******* Funeral accepted insurance assignment or was named as beneficiary on an insurance policy when the consumer made such assignment or designation with the intent of paying ******* Funeral for the costs of his or her own final disposition.

The State Board’s position (with regard to insurance assignments and beneficiary designations made prior to August 28, 2009) is based on the following:

31. Section 436.005, RSMo (2000), set forth definitions for the Old Law and stated, in relevant portion:

(5) "Preneed contract", any contract or other arrangement which requires the current payment of money or other property in consideration for the final disposition of a dead human body, or for funeral or burial services or facilities, or for funeral merchandise, where such disposition, services, facilities or merchandise are not immediately required, including, but not limited to, an agreement providing for a membership fee or any other fee having as its purpose the furnishing of burial or funeral services or merchandise at a discount, except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

What the State Board is asserting is that Chapter 436 has always defined as a preneed contract any insurance assignment or beneficiary designation made in favor of a funeral home prior to the death of the insured.   That will come as news to most of the industry (99.9% or so), and cause some operators to ask what those six Board Members are smoking.  But for those individuals who regularly attend the meetings of the State Board, this position may not necessarily reflect the views of the State Board members.

The Board’s staff began pressing the State Board more than two years ago to provide clarification on when insurance assignments and beneficiary designations constitute a preneed contract.   At that meeting in Festus, Missouri, the staff also reminded the Board and the industry of the funeral director’s duties under Chapter 208 to make inquiries to the Third Party Liability Unit (of the Department of Social Services) before making refunds to families.   The insurance issue resurfaced last fall (with the conclusion of the initial onsite financial examinations).  Since then, the issue has been bounced back and forth like a ping pong ball between the staff and the Board.   The staff has made various proposals, which the Board has rejected. 

As we have previously suggested, this transaction is one which should be documented by a contract.  Some within the industry assert there is no contract.  I disagree.  The policy owner has made the assignment or beneficiary designation with the expectation that the funeral home will apply the proceeds to their funeral.  The funeral director understands that expectation, and often relies on Chapter 208 for recommending the assignment of insurance.  I agree with the staff in that the ‘professional trust and confidence’ contemplated by Section 333.330.2(14) dictates that this transaction be documented by a contract.  The staff would then argue that any contract made by a funeral home that contemplates future performance must be a preneed contract, and ergo, a Chapter 436 contract.  I disagree. 

Chapter 436 was first enacted in 1965, but was re-written in 1982.  The 1982 law provided the industry the first definition of a “preneed contract”, which was the same as that cited by the Complaint, except that it did not include the following: 

except for contracts of insurance, including payment of proceeds from contracts of insurance, unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance[.]

There was sufficient confusion whether insurance policies were covered by Chapter 436 that the preceding phrase was added by legislation that took effect in 1986.  The 1986 legislation was hotly debated, and the product of various compromises, and the result included a horribly ambiguous definition.  A literal interpretation of the new “preneed contract” definition would find that an insurance contract is not a preneed contract ‘unless the preneed seller or provider is named as the owner or beneficiary in the contract of insurance’.    But when the seller or provider is named as owner or beneficiary, the contract of insurance is a preneed contract.   That bears repeating: the contract of insurance is a preneed contract.  What the heck does that mean?

The old law was poorly drafted, and ambiguous, in many respects.  There always has been confusion over the extent to which Chapter 436 governed insurance funded preneed.   The old law was written with one preneed transaction in mind: the trust funded guaranteed contract.   Joint accounts were addressed as the first afterthought, and then four years later, insurance was added as another afterthought.   For years the Board staff struggled with whether insurance funded contracts had to be deposited to trust.   And now, 30 years after the old law was enacted, the staff (or is it the State Board) wants to begin enforcing those ambiguous provisions?

What motivations does the staff have for pressing the State Board on the insurance assignment issue?   The need for clarity was the initial explanation given.  The next justification given was the need to protect the consumer.   Both of these have merit, but one can’t help but wonder if Chapter 208 may also provide a third motivation. 

It would be political suicide for any candidate to suggest that Missouri needs to raise taxes.  Instead, state agencies look for other ways to generate revenues, whether that be through fees or charges.  Accordingly, someone in Jefferson City may also be looking at the funeral home’s obligations under Chapter 214.  In conjunction with that 2010 meeting in Festus, the staff has incorporated a MO HealthNet page on the State Board website.   That page is meant as notice to the industry that funeral homes have a duty to make inquiries to Department of Social Services before making refunds back to families.   (You funeral directors can now add tax collector to your job description.)  But that duty only applies to Chapter 436 contracts.

The Complaint seems a heavy handed attempt to force the State Board to define the insurance assignments as Chapter 436 contracts.  While there is need for clarity and consumer protection, neither the old law nor SB1 was intended to regulate the assignment of an existing insurance policy.  SB1 is intended to regulate the sale of contracts where performance is deferred to a future date, and the administration of the consumer’s payments.    The staff must twist SB1 provisions to reach the conclusion that all insurance assignments give rise to a preneed contract.   That approach is not much different from the one NPS used with the old law. 

So, what are those State Board members to do?  Here is a proposal for their consideration.

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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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The “R” word is back again. We’re only three years removed from the housing bubble burst, but a sense of normalcy seemed to be returning to the death care industry. It wasn’t necessarily a return to the old ways, not with the increase in cremations and regulations. But, many operators were coming to grips with the changes that needed to be made. This past week’s events suggest the nation’s economy has entered another turbulent period that could last several years.

The debt-ceiling crisis, cuts to government spending, and foreign debt problems impacted US government bonds, foreign bond markets and the stock market. That’s bad news for insurance companies, preneed trusts and perpetual care trusts. Regardless of what type of funding a death care operator uses, the two-year economic forecast has to be concerning. The costs to servicing a guaranteed contract will likely outpace the funding growth.

Insurance companies will attempt to adjust through premium rate changes. But, can the consumer afford the premiums? As reported by the Wall Street Journal a year ago, consumers are finding they cannot afford the multiple pay policy, and if they have to cancel, the cash surrender value is a fraction of the amount paid.

We panned this article when published because it tried to characterize preneed as an investment, and for the elder attorney’s naïveté. However, the concluding recommendation has merit. A final expense trust provides both the consumer and death care operator a funding alternative that can meet their respective needs: affordability, flexibility, protections and higher cancellation refunds. But, it is not practical advice to tell the consumer to start up his/her own trust. Rather, this is an opportunity for death care operators to offer a product matched to the times.
 

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Not that close, even from the 30,000-foot view.

That’s our assessment of the Morningstar analysis of preneed and its impact on the death care industry. In “Dark Clouds for the Death-Care Industry”, a stock analyst attempted to explain the preneed transaction, and then provide an assessment of the impact of preneed on the profitability of the death care industry. Such attempts to generalize preneed are often misleading, particularly by an outsider looking in.

While the analyst raises a number of issues regarding preneed, only one can be described as generally accurate: there is a growing reliance on preneed sales. But then, operators in the smaller or rural communities may disagree because they do not face the competitive pressures that drive preneed sales. For the majority of the industry’s operators, competition has made preneed a necessity.

The article suggests that all preneed sales end up in trusts, and that the trust exposes the operator to investment risks. While this generalization has some merit, it completely ignores insurance funded preneed, and how those sales provide a background to assess the analyst’s preneed conclusions.

A majority of the states have preneed funeral laws that impose trusting requirements of 90% or more. The costs associated with a preneed program force larger operators in the 100% states to use insurance funding for the commission that will pay salesmen. The complaint currently heard from these operators is that the return on their insurance proceeds is not keeping pace with inflation.

The analyst states he would feel more comfortable if the industry turned to insurance companies for underwriting of the industry’s massive trust portfolios. Excuse me? The main problem with preneed trusts is that they are saddled with expenses, and are often ‘parked’ in fixed income investments. So, Wall Street’s solution to preneed would be to add a layer of expense through underwriting? Ignoring the state law issues, aren’t you suggesting to the operator that he should sacrifice the upside of his trust for the stability of a lower, more consistent return? How would that recommendation achieve the growth that you state is lacking for this industry?

The analyst also states that the industry must rely on preneed because of the lack of overall deaths in the marketplace. Perhaps the analyst meant to say there is too much competition for the current death rates in our communities. If so, then yes, preneed is becoming as important as heritage in maintaining (or growing) the operator’s market share. If the investment community believes preneed is bad for us, how would Wall Street propose funeral homes and cemeteries respond to competition in the market place?

Wall Street concerns over preneed are driven in part by misconceptions about the operator’s costs, and his exposures to trust funding liabilities. The analyst fails to make a distinction between the cost to perform a preneed contact and the prices listed on a general price list. The amount paid out of a trust when a preneed contract may not equal the current at need prices, but the trust proceeds do generally exceed the costs of the services and merchandise. Depending on the age of the contract, and the state’s trusting requirements, the older contracts may not be very ‘profitable’, but there is a profit, just not as profitable as the comparable at-need service.

The analyst also expresses concern the operator’s liability to fund the trust when the investment markets decline as they did in 2009. What state law requires that? Operators are not required to make ‘capital injections’ into their preneed trusts for investment declines. Such conditions may affect their authority to make income withdrawals, but not to require additional contributions.

Wall Street would prefer the death care industry to return to the day where at-need revenues constitute the base of operations. Most death care operators would share that desire, but most know better. Contrary to the analyst’s conclusion, operators are finding that it is the at-need service that is exposed to downturns in discretionary spending. Tight times make it easier for the consumer to choose cremation. If the preneed contract is paid in full, the family isn’t forced to come out of pocket to pay for the traditional service.

In conclusion, I have to concede that the analyst is somewhat correct about preneed exposing the operator to investment risks. Preneed has become a business reality, requiring many operators to make a decision between insurance or trust. Should the operator take the lower, but safer, rate of return of the insurance policy, or keep the upside of the trust (and its risks)?

Large funeral operators in 100% trusting states don’t have much choice but to use insurance.  For the funeral operator who wants growth and control over the direction of the preneed fund, then there is little choice but to assume the investment market risks that accompany the preneed trust. Cemeteries have no choice but to use the trust, and assume its investment risks. Cemetery preneed can be distinguished from that sold by funeral homes in that some merchandise (and services) is delivered prior to death, precluding the use of insurance.  

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With the exception of a few states, each form of preneed funding has its own statutory requirements. Consequently, different contract forms are required for each method of preneed funding. So, what does this mean for the consumer worried about the safety of funds paid to the funeral home or cemetery.

Among the pecking order of contract forms, insurance funded contracts generally tend to be among the more compliant forms. The larger preneed carriers understand that if they are to win the funeral home’s business, the carrier must be able to provide the funeral home with the preneed contract form. When there is a problem with an insurance funded contract, often it is because the agent has chosen the wrong form. For example, the recent law change in Illinois requires new disclosures to be made in the contract form. If the agent pulls an old form, the contract is in violation of SB1682.

In terms of compliance, the trust-funded contract may place a distant second depending on who sponsors the trust (and whether the consumer’s state requires the filing of the preneed contract form). While the national companies (and some state associations) are diligent about having their contracts reviewed for compliance, that has not been the case for many independently owned funeral homes. While state associations are due credit for bringing a higher level of compliance to their state’s contract form, some associations (such as the contract forms used by the IFDA) set a very low bar.

The most suspect of the funding methods contracts is the depository (or self administered) account. With this funding method, the preneed seller is going solo without the assistance of an insurance company, the state association, or even a fiduciary. All too often, the operator assumes a contract is a contract, and ‘borrows’ a contract form from another funding method. Or worse yet, the funeral home uses the FTC at-need goods and services form as the preneed contract.

To prepare for a regulatory examination, sellers need to confirm they are using the correct (and current) contract form. Within each funding folder, the seller should establish a current contract form folder and a historic contract form folder. Similarly, the operator will want to maintain a current GPL and Outer Burial Container price list and a historic GPL and OBC price list folder (going back indefinitely).

While many consumers tend to purchase preneed based on personal trust earned by the funeral director, contract form compliance demonstrates that funeral director’s understanding of the preneed law. Preneed contract form compliance is also the consumer’s protection should the trusted funeral director ever be hit by a bus. The next owner of the funeral home will be bound by the terms of those preneed contracts, not necessarily the oral assurances of his predecessor.
 

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