Check Up Time with Your Pre-Need Provider

Pre-Need insurance means different things for different funeral homes.  Some funeral homes use pre-need to build market share, some use pre-need as a cash-flow tool, and some use pre-need as a means of providing revenue and net income to the bottom line.  Probably more often than not, funeral homes use pre-need for a combination of all three of those factors.

I began in the 1980’s in the funeral business in Minnesota where insurance based policies were not legal and all funds set aside for funerals provided at a later date had to be held in trust by an FDIC insured bank and the interest would accrue to the account.  It was some time before the movement for insurance based pre-need financing came to Minnesota.  Bank trusts were pretty simple — you could put the money in the bank of your client’s choice at the interest rate they offered and then just let it ride from there.  You never had to worry about the solvency of the bank because the amounts set aside were always within the FDIC insurance ranges.  However, you also were never paid anything for your services in pre-need and it was truly just a service that the funeral home provided the eventual client.

Moving forward insurance based pre-need financing came and with it some ability to reap some rewards for your efforts, but also some responsibilities that you owe the consumer.  One of these responsibilities, that you should not take lightly, is that of being a smart fiduciary representative for your clients.  You want to make sure that the insurance company where you park the money is financially stable and the money is secure so that it is there when the client needs it to pay for the funeral services provided.  I should mention that this responsibility is necessary whether the funeral account is a guaranteed funeral account or a non-guaranteed account.

I eventually got to the point where I went from being someone who only put client’s money into bank trust accounts to someone who actually owned an insurance agency for the sake of providing pre-need funeral insurance for funeral home clients.  Every year I did a walk through of the companies providing insurance in Minnesota and the positives and negatives of working with the different companies.   Here are the four things that I really looked at when selecting pre-need insurance partners:

  1. Financial Strength —  Actually this is pretty difficult for most funeral directors who own small funeral homes to get their hands around.  I would look at the “Best” ratings and just make sure that the company had not been downgraded.  I always felt that the State of Minnesota somewhat did this for me when the Insurance Commission awarded a company the “right” to sell in Minnesota.
  2. Growth Rate of Policy — I looked at the growth rate of the face value of the policy to make sure that it could keep up with our funeral cost inflation.  A guaranteed growth rate of about 3% is what I always felt was pretty fair.  Anything lower than that might not keep up with inflation and anything higher would subtract from the other variables of “Bonus (bump) Rate” and commission.
  3. Bonus Rate — Many funeral directors call this the Single Premium “Bump”.  In actuality it is a mortality rate based amount that is calculated as the Original Face Value over the Original Single Premium payment.  For instance, a policy holder, at age 55,  might receive an initial policy face value of $6000 on a $5000 premium whereas a 60-year old might receive a $5500 original face value on the same premium because that person was older at the time of issuance.  Again, it was nice to provide the consumer client a “bonus”, but again, too big a bonus would subtract from the variables of growth and commission.
  4. Commission – A fair commission was always necessary, but fair does not have to mean “large”.  Again, a large commission would only subtract from what you were trying to do with growth and/or bonus rate.

That is the way that this funeral director looked at pre-need.  Take a look at your provider and see where you rank as far as these four criteria.  Is there one that is over-weighted and causing the other sides of the triangle to be off balance?

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