During the long and tedious Chapter 436 hearings, some Missouri funeral directors joined consumer advocates in using the NPS failure as reason for recommending that legislators impose 100% trusting on the preneed transaction. Those funeral directors generally advocated the use of insurance or joint accounts as safer methods of preneed funding. During regulatory meetings, comments were also made about how the insurance policies or joint accounts were ‘guaranteed’. The realities are that each of these forms of funding has its advantages and disadvantages, and that there are no absolute guarantees.
The AIG failure underscores that even the largest of insurers may be vulnerable to the current financial crisis. While most life insurers are safe, the only guarantees offered by insurance are the rates of return promised by the policy terms. As witnessed by the Texas insolvency proceedings for Lincoln Memorial life, the insurer’s promises are only as good as the assets held in its reserve accounts. After that, the policyholder must look to guaranty funds for assistance. Consequently, funeral directors should periodically review the financial statements of the insurance companies they use for preneed funding.
With regard to keeping those preneed funds at the local bank, the funeral director is assuming risk (and liability?) when he exceeds the FDIC insurance coverage. By holding the consumer’s payments in a joint capacity, the funeral director is also exposing the funds to the claims of the funeral home’s creditors. Losing a lawsuit for damages that exceed the firm’s casualty insurance put the consumers at risk.
In contrast, the funds placed in a preneed trust are not the assets of the bank or the funeral home. By virtue of the terms of the preneed contract, the funeral director usually has the risk of investment performance (and under the current circumstances, that’s more risk than what some funeral directors want). But in contrast to insurance and joint account contracts, the trust provides the death care operator some say in how investment risk should be handled.