Funeral homes frequently allow the assignment of insurance as partial payment towards a trust funded preneed contract, but the manner in which the assignment is made can cause problems for them. Preneed trustees will not accept an insurance policy for a host of reasons. Insurance proceeds paid to a trust are not tax free and require individual administration for tax reporting. Most preneed trusts are also subject to the prudent investor rule, which requires diversification. Insurance policies do not pay income for the payment of expenses. Upon the cancellation or lapse of a trust funded contract, applicable law typically contemplates the return of funds (not an insurance policy). Consequently, most trustees will not accept the insurance policy.
If applicable state law allows the funeral home to be named the policy beneficiary, then there are ways for the funeral home to use a contract addendum where both trust funding and insurance funding are considered. The goods and services to be purchased with each source of funding should be described separately. If a trust funded contract is prepared describing all goods and services with the insurance policy as partial payment, the contract will appear to an auditor as underfunded. The funding reported by the trustee will never reflect the insurance proceeds. In Missouri, auditors rely upon the trustee report to identify consumers to send inquiry letters. (Letters are sent to trust accounts that reflect amounts are still due on the preneed contract.) One funeral director complained to us about this procedure, suggesting that auditors should be able to figure this out. In response, we suggested that funeral homes can expedite the audit procedure by avoiding that situation.
We advise funeral homes to apply insurance proceeds with a non-guaranteed insurance addendum. We recommend the insurance addendum be non-guaranteed because there is too high an incidence of the insurance proceeds failing to cover the planned costs of the funeral. This can be due to policy lapses, family members borrowing against the policy or the policy not keeping track with funeral costs.
The trust funded portion of the contract should only describe those services and merchandise to be paid by the trust. But, the funeral director has a decision to make about whether the trust funded portion of the contract should be guaranteed. If the sales price of the trust funded portion is less than the non-declinable services and the casket price, then we would recommend a non-guaranteed contract.