Can you find some extra cash-flow in Preneed

In the last couple of months or so I’ve heard from funeral home owners, or heard on a webinar, that the loss of revenue on a per case basis has been anywhere from about 9% to almost 40% in North America.  Even the public companies, such as Service Corporation International and Carriage Services, acknowledged in their latest quarterly reports that their revenues per case have dropped over 8%.

It is almost universally believed and recognized that this drop in per case revenue is due to an increase in cremations and the loss of service revenue that has been driven by the restrictions placed on social gatherings due to the COVID-19 pandemic.  That size of revenue loss will cause financial pressure on your business, especially if you are not located in a COVID hotspot where the increase in death calls may somewhat blunt the revenue per case loss reality.  Finally, in this COVID world we are all operating in, your expenses for cleaning and personal protection equipment has increased regardless of your operation size or location.

The reality of the situation is that most funeral homes are now operating in a reality of less financial margin for the business.  Today, we will look at one possible area of your operation where you may be able to bring in more cash to deal with this reality.  Preneed.

I operated my funeral home in Minnesota, which like most states allows insurance sales for funeral planning.  As I learned more and more about the financial variables of  preneed insurance I came to believe that there were basically three financial components to each policy:

  1. Growth Rate
  2. Bump or what I called “Bonus Protection”
  3. Commission

I categorized each of those components on a spectrum from “high to low” and realized that if an insurance company was given a “high number” on each of them, the company was probably too good to be true and might eventually have financial problems of its own.  On the other end of

Tom Anderson
Funeral Director Daily

the spectrum, if each component was categorized by me as “low”, my thought was “who would ever purchase that policy”.

So, in essence, you looked at each product or company along the “high/low” scale and then marketed to consumers the product/company that you believed was just and fair and fit your funeral home philosophy.  Let’s take a look at two hypothetical policies that could both be sold as your preneed product depending on your circumstances at the time.

Product 1 – High Growth Rate (3% annually), High Bump or Bonus Protection (Let’s say an $8,000 single premium gave an immediate $9,000 worth of coverage), and Low Commission (3% on the $8000 single premium or $240)

Product 2 – Lower Growth Rate (2% annually), Low or No Bump or Bonus Protection ($8,000 single premium is worth $8,000), High Commission (8% on the $8,000 single premium of $640)

Quite frankly, there is nothing wrong with either of these policies.  Even with Product 2 the consumer comes out better than a simple bank trust certificate of deposit growing at about 0.5% annually in today’s market.

I always favored, as a funeral home owner, Product 1.  I favored it for a couple of reasons.  First of all, our funeral home was set up to make our margins and profits from servicing funerals, burials, and cremations.  And, the more money a consumer had available to pay for those things generally brought a higher sale.  Product 1 growing for 10 years with 3% simple interest would generate a “bag of money” at that time of $12,095.  So, if the insured from Product 1 died in 10 years we had $12,095 to work with during death care arrangements.  Of course, ten years earlier, we had received a commission of $240 for setting that policy in place.

Product 2 works also.  However, because the funeral home took $640 to set up the policy and the growth rate being lower at 2%, in ten years time the funeral home has a “bag of money” of only $9,751 to use during the death care arrangements.  However, at the time of the policy inception you have received almost 2 1/2 times the revenue you did with Product 1.  That higher immediate cash commission may be an important factor in deciding to use Product 2.

We always favored Product 1 in these types of scenarios.  We felt it was best for the consumer. . . and in the long haul, best for the funeral home.  Of course, a lot depends on your dynamics. . . do you need higher commission revenues to pay preneed staff and or marketing to bring preneed clients in the door.  We also were consistently driving up our revenues per service and growing in numbers of cases which made Product 1 a really good financial fit.

Today, however, revenues per case are moving downward and expenses, especially those tied to the COVID pandemic are rising upward, making a strong financial dynamic much more difficult for funeral homes.  The point of this illustration and article is that in this time of unusual circumstances where you may be leaking revenue due to government restrictions on gatherings, a change in your preneed philosophy, even if only temporary, may be a place that you can find current operating cash.

Many preneed insurance companies offer policies that differ in their rates of growth, bonus protection, and commission.  Maybe now is a good time to have a discussion with your preneed provider to see what is available in your state.

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