For consumers who need installments to pay for their preneed arrangement, funeral directors report that the $100 monthly payment is the comfort threshold for most individuals.   For a widow planning her own funeral, the $100 monthly payment will require an installment term of six years or longer.  If the widow needs to also cover an interment space, vault, marker and services, the installment term will be pushed out to ten or more years.

In a prior post we explained how a deficiency between preneed investment returns and performance cost increases will exacerbate preneed shortfalls when the consumer pays with installments.  But, funeral homes suffer preneed shortfalls even when the investment performance keeps track with performance cost increases.   If a 70 year old widow purchases a $7,500 funeral arrangement with a monthly payment of $100, six years is required to pay the preneed contract.  Until the contract is fully funded at the end of the sixth year, the trust must earn more than the funeral home’s performance costs to keep pace.   The Social Security’s life tables indicate that the 70 year old widow will live another 16 years.  As the attached spreadsheet shows, that same funeral will cost $12,154 in 16 years.  But the funeral home’s preneed trust will have only grown to $11,184.  So when the funeral home’s performance costs and preneed trust both maintain the same 3% rate, the funeral home will have a shortfall of $970 when the contract is performed.  If instead, the funeral director’s performance costs rise at a higher rate than his preneed funding, the 72 month installment contract will result in a shortfall of thousands of dollars.

For funeral homes using insurance funding, the shortfall will often be worse.  Funeral homes have been trained to believe insurance is the best funding option for consumers who need the installment option.  We will look at the insurance option from the consumer’s perspective in a future post to explain why insurance contracts have a higher rate of lapses.