A preneed client recently complained about preneed shortfalls they were experiencing on trust funded contracts.  We went back to our 2014 blog post (The Factors Contributing to Preneed Shortfalls: Investment Return and Operator’s Performance Costs) and began an analysis of those factors.  Since the ‘culprit’ is usually poor investment returns, we started with a review of the client’s trust.   Over the past ten years, this client’s Post88 Trust had a net investment return of more than 3.5%.   In comparison to what most trusts are returning, this client has had a fairly healthy return despite the 2008 financial crisis, low bond rates and a volatile equity market.

We next spoke with the client’s CPA to request the internal rate of cost increase.  This has not proved to be an easy number to provide, and so the CPA will have to ‘dig deeper’.  But, the CPA felt that the rate of cost increase was probably on the north side of 4%.

We then started looking at the client’s contracts in terms of those that paid in a single premium and those that paid by installments.  We found that this client had allowed consumers to use 8 year installment terms so that monthly payments were less than $100.  We soon found that these long term contracts were not affording the trust sufficient time to recoup investment return.  Assuming that the client’s internal rate of cost increases were 3.5% (and matched the trust’s investment return), the payout on the 96 term contract was $1700 less than the contract’s sale price.   Then, we assumed that the ‘loss’ would be the same so long as the trust return matched the rate of cost increase, but that did not prove to be the case.  The higher the client’s rate of cost increase, the greater the cost of installment payments.  We found that the shorter installment terms (24 months) could even result in a $500 loss.   Logic suggests that the installment cost to the preneed seller is even greater when the investment return is less than the rate of cost increase.

We have always advocated the need to provide the consumer payment options, but we now recognize the need for program provisions that offset the loss of investment return.