Preneed companies often reach too far in touting the advantages of their company or product. Such is the case with an article in the June edition of the American Funeral Director. Not to be confused with the infamous Lincoln Memorial Life, Lincoln Heritage Life offers advice why insurance funded preneed is often a better choice for funeral directors and consumers. While the author is correct about there being advantages to the insurance funded product, the article makes several gross generalizations and neglects to address the disadvantages of insurance. The timing of the article couldn’t be worse with the evolving NPS/Lincoln Memorial Life scandal.
Preneed companies should know better than to make such generalizations. State laws regulate the preneed transaction, and so long as this remains true, the wide variance in these laws precludes simple generalizations. Preneed laws are confusing, and often contradictory. Preneed companies should resist giving consumers and funeral directors an impression that is otherwise. Funeral directors are not children, so drop the condescending analogies to the Cookie Monster. Insurance doesn’t mysteriously create two cookies.
Purchaser payments are used by the insurance company to pay commission, administration, contract forms, state insurance department filings, advertising, taxes, actuary salaries, marketing expenses, and reserve requirements. The insurance company overhead results in a low cash surrender value for the older consumer. The older the consumer, the higher the mortality risk. The higher the mortality risk, the more the insurance company has to charge for the insurance policy purchased with installments. The preneed consumer in his/her 70’s may end up paying premiums that exceed the policy death benefit.
Under given facts, the insurance policy will out perform a trust. For the preneed contract that has a duration of ten or more years, the properly managed trust often outperforms the insurance product. How does the article’s analysis hold up for the trust that averages 6 percent after taxes and expenses? The problem is that many trusts are not managed well, and the investment return may be the low 4 percent the author describes. Small preneed trusts are often ‘parked’ in mutual funds or government securities.
What about those licensing requirements? Maintaining individual life insurance licenses can be burdensome for funeral directors. With the NPS/Lincoln debacle, the industry will likely see states pass tougher laws on who can sell insurance. After all, the NPS/Lincoln crisis is as much an insurance problem as it is a trust problem. As the article suggests, funeral directors should look closely at the insurance company’s history and financial strength. Also consider the ‘associates’ that the insurance company retains. For those NPS providers looking for a new insurance program:
"Fool me once,
shame on you.
Fool me twice,
shame on me."