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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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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It seems paradoxical to see preneed regulators ramping up audit programs while state budgets are being slashed to the bone. Yet, several I-70 corridor states will soon implement new preneed audit programs.

Missouri’s preneed funeral audits will be funded out of a combination of license fees and preneed contract fees. Missouri’s new cemetery law did not provide for any additional fees to offset the expense of a new reporting system and audits, and so, one most anticipate the state will look to recover from its expenses from non-compliant cemeteries.

Colorado had a modest, but significant, law change: the preneed regulator was granted authority to assess fees against preneed sellers to fund examinations. With a source for funding, new audit procedures have been submitted for approval.

With regard to cemeteries, Kansas quietly promulgated a regulation authorizing a $20 per preneed contract fee. Kansas would like to use a portion of those fees to implement a preneed contract database that would provide data that would be used in cemetery audits.

Nebraska also has plans to implement a new preneed database for auditing master trusts. In the absence of funding legislation, the Department of Insurance must use a carrot and stick approach with the state’s larger preneed sellers. Similar to the Illinois approach, the Nebraska stick would be the assessment of audit expenses against the non-compliant preneed seller. Illinois’ recent preneed law change (SB1682) raised the possible assessment from $7,500 to $20,000. For the preneed seller found to have issues of material non-compliance, the costs of a full audit could cost tens of thousands of dollars. And then there’s the issue of funding up deficiencies. As the Illinois law spells out, the audit penalty cannot be paid out of the preneed trust.

For preneed sellers from Illinois to Colorado, it isn’t a matter of whether there will be exams or audits, but when. For some states, those exams will come sooner than others. Missouri is currently training new examiners, and could well release them on those sellers who miss the October 31st renewal deadline.
 

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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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For more than 20 years, Nebraska preneed sellers have filed an annual report that accounts for the aggregate contributions and distributions from their trust funds. The annual report form also computes the amount of income that must be accrued to the account if the seller elects to withdraw excess income from the trust. In its quest to determine whether preneed trusts are adequately funded, the Department of Insurance has made a request for individual contract data that supports the annual report.

Nebraska’s request for individual contract data reflects a trend developing with other Midwest death care regulators.

Individual contract data reporting was a priority in failed legislation by Kansas regulators.

Missouri’s State Board of Embalmers and Funeral Directors has acknowledged the need to determine whether existing preneed trusts are adequately funded, and that objective requires some detail about what comprises the trusts established under the prior law.

Missouri cemeteries are about to embark on preneed sales under a new law, and regulators have already expressed a need to know about those sales.

While many death care operators may challenge the individual account data request as burdensome or intrusive, operators harmed by NPS or the IFDA insurance debacle, have reason to be providing such information.

The degree an NPS provider suffers ‘damage” by honoring a preneed contract depends on several factors: the age of the contract, the casket, the funeral home’s current atneed prices, to name a few. To challenge that more than the guaranty association payout is needed, the industry must be willing to provide hard facts based on actual contract data. If the active NPS contracts are included in a state’s annual reporting, a basis has been established for a database for tracking the NPS consequence to the industry.

The same is true for Illinois funeral directors seeking to recover for the IFDA asset meltdown. Recovery has to be based on contract data.
 

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The General Laws Committee of the Missouri Senate will hold a hearing this Wednesday (April 7th) on SB 1025. This bill provides hope to many small, rural funeral directors who would rather avoid the preneed transaction and the regulatory morass of SB1.

The bill would add a new Section 208.010.5 whereby individuals seeking to spend down assets to qualify for assistance could establish an irrevocable trust of up to $10,000. The trust could only be used for funeral and burial expenses. The section would also exclude the arrangement from Chapter 436.

When a similar provision was included in last year’s SB1, the funeral directors association expressed concern that the arrangement would be abused. However, the requirements of SB1 have proven burdensome and confusing to the industry, extremely so for the funeral home that only accepts “pre-arrangement funds” as an accommodation.

A Chapter 208 final expense trust would provide the consumer and his Missouri funeral operator a much-needed alternative to the joint account contract.
 

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The fear of SB1 drove the Missouri cemetery industry to push for Chapter 214 legislation in 2009, only to have the wheels come off at the stroke of midnight last May. While legislation was passed, the original bill was gutted, and the resulting changes were incoherent and confusing. It was no surprise that the industry would pursue a bill to correct what was done in 2009.

An industry bill was introduced in the 2010 session as SB754. However, that bill was quickly replaced by a Senate Committee Substitute. The substitute bill incorporates changes sought by the State, the speed in which the bill was produced signals regulators’ recognition that Chapter 214 reform is needed.

Over the next several weeks, the death care industry and consumers need to take a close look at SCS SB754. Legislators will only provide the parties so many attempts to ‘get it right’. And while this bill contains several needed changes, it also has provisions that beg for questions, and answers. Take preneed for an example.

Section 214.387 will govern how the cemetery industry is to sell preneed in Missouri. Prior to last year’s legislation, Chapter 214 provided minimal oversight of preneed sales of markers and services. If a cemetery wanted to sell a vault on a preneed basis, it had to comply with Chapter 436. Chapter 214 did not contemplate trust funded preneed.

Section 214.387 takes a page from the ‘old’ version of Chapter 436 by requiring Missouri cemeteries to deposit 80% of a consumer’s payments to an escrow account or a trust if the preneed contract defers delivery. Last year’s model of 214.387 first established the new trusting requirement, but did so with confusing language. So in a sense, Missouri cemeteries went from zero to eighty last year without guidelines.

SCS SB754 attempts to provide some of those guidelines, but it misses a few beats.

The 80% trusting requirement will be one of the highest in the country. Many states’ cemetery laws trust on the wholesale costs of merchandise. This poses an audit nightmare (ask the Kansas Secretary of State). The wholesale threshold is crossed somewhere around 40 to 50% of retail. Consequently, the cemetery laws generally have lower trusting requirements than that imposed on funeral homes. But the second piece of the puzzle for cemetery trusting is the income accrual provisions.

Cemeteries have cash flow requirements that differ from that of a funeral home. States’ cemetery laws reflect this by permitting the disbursement of preneed trust income. Typically, the higher the trusting percentage, the more likely income disbursements will be allowed. But, there are exceptions (Iowa for example).

So, it’s no surprise that 214.387 contemplates income distributions. However, the bill only authorizes income disbursements from escrow accounts. The bill does not include a corresponding authority for preneed trusts.

Another glitch in 214.387 would provide consumers a refund that would include half of the income earned on the account. If escrow accounts are distributing income to cemeteries, then someone would have to ‘come out of pocket’ for refunds to the consumer.

The quick solution to these 214.387 issues would be to allow both types of accounts to distribute half the annual income, leaving the balance of income in the account until the contract is canceled or performed. As such, the Missouri law would provide higher trusting safeguards than most other states.
 

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 NPS salesmen had quite a reputation. Commission driven, some were reported to have earned a healthy six-figure salary. And, some had no prior experience in the funeral industry.

To curb the excesses committed by NPS salesmen, Missouri preneed reform bill requires preneed salesmen to be licensed, with a condition that they “have successfully passed the Missouri law examination as designated by the board”.

Since the effective date of the law (August 28th), preneed agents have been required to take the same law examination required of funeral directors. That examination has proved difficult for many preneed agent applicants, and issues were presented to the Missouri State Board of Embalmers and Funeral Directors at their February 4th meeting. The State Board held an open meeting by conference call on February 11th to facilitate further discussion of preneed agent licensing and the Missouri Law Test.

Two basic positions emerged during the February 11th conference call. The funeral directors’ camp views the preneed contract as the sale of a funeral, which should require the licensed funeral director. The proactive preneed seller views the preneed contract as a funding vehicle to pay for the goods and services described in the contract, which would require the salesman to be knowledgeable about the requirements of Chapter 436.

Historically, most Missouri preneed contracts were of the guaranteed variety. If the preneed contract was performed with little or no variation to the prearranged funeral, then the contract represents the purchase of a funeral. But, some families change the terms of their preneed contracts, and under such circumstances, the contract represents a funding vehicle. As more non-guaranteed contracts and final expense products become more common, fewer preneed contracts will represent the “sale of a funeral”.

For the time being, the State Board will continue to require the same law examination given to applicants for a funeral director’s license. But, is the funeral industry best served by restricting preneed agent licensing to legal testing imposed on funeral directors?
 

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The funeral director’s decision about how to fund his preneed is influenced by the state’s trusting requirement, investment returns, administrative convenience and the volume of preneed business. Essentially, there are three methods of funding preneed: the depository account, the master trust and the insurance policy.

The funeral director’s use of the depository account predates all state preneed laws. The industry has been accommodating families for decades by accepting payment for a future funeral, and then placing those funds in an account at the local bank. The early preneed laws reflected this practice with language that sought to impose how the depository account was to be structured. Those early laws gave rise to the “joint account contract”.

By the 1970s, proactive preneed sales organizations were testing the limits of the depository account. Low returns and administrative hassles caused the proactive seller to abandon depository accounts in favor of insurance or master trusts. For states with high trusting requirements, the proactive seller turned to insurance funding because it provided the commissions required to pay salesmen and finance the preneed program. In states with a lower trusting percentage, the master trust provided the seller the economies of scale to achieve higher returns and lower administrative costs. But, the master trust’s popularity was stunted by Revenue Ruling 87-127.

With preneed insurance carriers now cutting policy benefits, some funeral directors will need to reexamine the master trust, and the use of finance charges.

Generally, the purchase price of a guaranteed preneed contract is set by the funeral home’s general price list (the prices it charges for a funeral that would be performed today). In today’s economy, fewer consumers can afford to pay for a preneed contract with a single payment. But when a family is permitted to pay for the preneed contract over a period of five to ten years, the cost of the funeral at the contract’s performance will often exceed the trust proceeds by thousands of dollars. Regulators assume that the trust’s income will offset or exceed the rise in the costs of the funeral, but that is seldom the case with contracts paid by installments. These contracts often representa loss to the funeral home.

Some funeral homes already include finance charges in their installment payments to offset the loss of trust earnings. However, funeral homes have not been consistent in their disclosure of the finance charges. In fact, NPS was notorious for incorporating a 12% administration charge into an installment schedule that also included a mortality charge. None of which was disclosed to the consumer.

As reflected by a Kansas Attorney General’s opinion, regulators often perceive that finance charges are an exploitation of the consumer. Instead, regulators should ensure that finance charges (or administrative charges) are adequately disclosed to the consumer, and reasonable to both the consumer and the seller.
 

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I learned the preneed business from an organization that used the term “preneed counselor”. Consumer advocates, and many funeral directors, rail at that characterization, and insist a salesman is a salesman, no matter what you call them.

For purposes of debate, I would agree that all preneed counselors are salesmen. However, not all preneed salesmen are counselors. While both have to make a living, the counselor places an emphasis on education. But, the distinction between the counselor and the salesman is made difficult by the fact both tend to be compensated on the commission basis. This rubs the public and many funeral directors in the wrong direction; a fact not lost on proactive preneed sellers.

The Catholic Cemetery ran “Point – Counter Point” articles in its December and January editions on the advantages of commissioned-based programs and salary-based programs. Rich Peterson, of the Archdioceses of Seattle, led off with a description of how his “Pre-Need Sales Counselors” perform outreach to a Catholic population that is scattered across a large geographic area. Demographics and geography force the Pre-Need Sales Counselor to go to the families.

Richard Touchette, of the Dioceses of Albany, uses salary-based “Family Service Representatives” to perform outreach to an ‘entrenched’ Catholic population. In contrast to its Seattle counterpart, most of the outreach performed by the Family Service Representatives is done at the Dioceses’ cemeteries.

As Mr. Peterson explains in this article, all preneed programs have costs such as training, staffing and advertising. Mr. Peterson could have gone farther and addressed the costs associated with contract administration, regulator compliance and document development. However, the program that must seek out its targeted audience will always have greater costs per sale. These organizations must be more “proactive” in making their connections to families. The salesmen must spend substantial time away from the cemetery’s offices. Cemeteries and funeral homes with ‘heritage’ may adopt a more passive approach to preneed marketing, and can better handle preneed sales with a salaried staff that remains on the grounds.

Another factor in the commission vs. salary issue is applicable state law on trusting requirements. When a state sets its trusting percentage at 100%, or even 90%, the preneed program must be funded to some degree from the cemetery’s general revenues. Mr. Touchette’s cemeteries are subject to a much higher trusting requirement than Mr. Peterson’s. Consequently, the Dioceses of Albany cemeteries cannot recapture all of these preneed costs at the inception of the sale. A high trusting requirement is even more detrimental to a cemetery than a funeral home.

Funeral homes are not called upon to perform a preneed contract until there has been a death. When state trusting requirements prove too high to fund a preneed program, a funeral home can turn to insurance funding and use the commissions paid by insurance companies to pay counselors/salesmen and offset program costs. In contrast, cemeteries often deliver preneed property and merchandise prior to the purchaser’s death, which precludes insurance funding. Consequently, cemeteries must use trust funding or constructive delivery.

The proactive preneed program will always be distinguished by marketing and outreach that consummates a transaction someplace other than at the operator’s offices. While all cemeteries and funeral homes strive for the heritage that brings families to their door, most face challenges and competition that require them to reach out to their families. Few individuals have the personality and commitment to walk into a family’s home to discuss mortality. For better or worse, the industry has compensated these individuals on a commission basis.

With NPS, the worst was encouraged with commission rates that allowed salesmen to make six figured salaries at the expense of elderly consumers. As one of the states hardest hit by the NPS failure, Missouri’s legislators will be pressured to impose tougher trusting requirements on all preneed programs. Rather than punish all preneed programs by instituting 100% trusting, Missouri should consider a cap on the commission that may be paid to the preneed salesman.

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