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

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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Several states have passed laws in the past few years mandating greater preneed oversight. But with state budgets in decline after the 2008 market crash, regulators are hard pressed to find a way to pay for consumer protection.

Colorado’s new law simply states that the contract seller shall bear the cost of its examination.

In failed legislation earlier this year, Kansas sought to finance preneed cemetery oversight through a per contract fee. Sources indicate that Kansas will attempt to implement a $20 per contract fee later this year through new regulations.

Missouri took a hybrid approach last year through seller/agent/provider license fees and a $36 per contract fee. Ten months into the mission to provide preneed oversight, the State Board of Embalmers and Funeral Directors do not have enough data to know how well this approach will work. The first reporting period is still four months away, and no one knows how many preneed contracts have been sold since August 28th. As a consequence, license fees will likely be increased, which hits the smaller operator the hardest.

In a 180 degree change from last year, the State Board is mulling whether to increase the per contract fee, knowing that most sellers pass that fee on the consumer. In response to pressures from consumer advocates, the State Board had originally taken the position that sellers should be required to absorb the $36 fee. The reality is that the costs of preneed oversight are passed on to the consumer in one form or another by the preneed seller, and the per-contract fee provides transparency to the consumer.

Agencies, such as the State Board, that are charged with licensing preneed sellers and agents, need to charge some form of fee to cover the administrative costs of licensure. However, there is justification that the transaction (i.e. the consumer) should primarily bear the cost of examinations and oversight. On the other hand, it is not equitable that consumers bear the costs of disciplinary proceedings for the operator that fails to materially comply with the law.

With the per-contract fee, consumers and operators are provided a clear benchmark of the costs of their state’s preneed protection program. Such a fee will place a burden on regulators who must budget for fixed program costs (such as dedicated staff).
 

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