How does your firm view Preneed?

September 26, 2022/Afternoon Edition/

I have a son that works in the automotive industry and we’ve discussed their lines of revenue quite often. For instance the average dealership has about six primary lines of revenue – new car sales, used car sales, the service or repair center, a collision repair center, a leasing center, and a financing center. At any given time some of those lines may be bringing in revenue. . sometimes dependent on the economy and supply chain.

In the funeral home business my primary line of revenue was services — either funeral or cremation. I would argue that I had ancillary lines in casket sales, vault sales, paper product sales, and urn sales. Dependent how many resources you put into it you may have had a nice line of monument sales too. However, those additional revenue lines, in my opinion, were ancillary and not primary.

What about Preneed? How do you approach Preneed?

Early in my career, and I operated in Minnesota, we were not allowed to take any money from the sale of preneed. The state did not allow insurance sales and we were a 100% “trust” state. . . meaning 100% of the money put in preneed had to be deposited into interest bearing accounts at an FDIC insured facility.

With that type of rule our preneed division was simply “a service” to our clientele that had the added benefit to our funeral home that we knew money was in the bank for the services and that it could be accessed quickly helping with our cash-flow. One other benefit was that we could use it to talk to families and try to increase our market share by getting people to “select” our funeral home before need.

With those rules, certainly preneed was not a revenue driver. . . .or was it?

I bring up that question because we had to trust 100% and that money was allowed to grow. If that money could grow at a rate faster than inflation, then it would allow the preneed consumer to grow a pot of money larger than their expected funeral expense. And, if that did happen, could we get them to use that money on additional services. . . thereby bringing us increased revenue?

That’s a good question. . . and, I think the answer was yes.

Eventually insurance products were allowed to be sold by funeral directors in Minnesota and commissions could be paid to an agency owned by the funeral home as well as the insurance representatives themselves. However, my mindset was that “preneed was a service” and we funded its operation from the funeral home. The advent of that ruling did however allow us to capture commission money to pay preneed compensated employees and use some of the “agency” money for customer acquisition needs such as advertising and seminars.

I eventually looked at the insurance companies that I could align with in offering insurance products. In my opinion, all of them offered choice in the following three financial realms. And, in essence, companies had to balance the premiums paid into these categories. . . .

Initial face value. I used to call this “Bump” over what the consumer actually paid. I would tell families it was “an incentive” to get younger people to prearrange and let their money work longer for the insurance company. Generally, it was a higher number the younger an insured was.
Growth Rate — just what it says. How much is the policy guaranteed to grow over the years. Most of my working years a high growth rate was probably 4% and a low growth rate probably 2%. Some were set by a variable such as the Consumer Price Index.
Commissions — The company usually had a high commission payout, an average payout, or a low payout upon the insurance sale.

An insurance company could not have high commissions, high growth, and high bump all on the same policy because it would not be economically feasible for them to do so. They had to balance those categories.

Tom Anderson
Funeral Director Daily

For most of the time that I was in business I chose what I considered a “balanced” approach of picking a plan that offered high face value, average growth, and low commissions. Not every one would do it that way but it “fit” my lifestyle and business style — that is one of delayed gratification.

At the end of the day preneed in itself was not a major cash revenue producer because we chose to have low commissions. The commissions were enough to pay the staff and advertise but did not contribute, in a major way, to the funeral home’s bottom line.

However, when it came to the time of need, because of the higher initial face value and at least average growth rate, there was generally more money in the account than was needed for the funeral that they had ballparked. Because of that, many times a better and more profitable casket or vault was chosen as well as many times a visitation was chosen when it was not on the original agenda.

I would contend that this arrangement led to a more profitable bottom line and also contend that it led to fewer times when the growth of a policy did not keep up with the funeral home’s cost to service a preneed contract. And that fact turned into a positive public relations message from those that had pre-arranged with us. They would be able to tell others that “over a few years our account had more money than we needed”. I took that as a much better message that was being said of other funeral homes. Messages such as, “Mom pre-arranged, but it didn’t keep up with funeral expenses and we still had to put our own money in to pay the funeral expenses.”

Preneed companies generally have multiple plans for funeral homes to choose from. Make sure that you go over the options with your sales representative and that the plan that you choose meshes with your business operation and style.

Here’s one plan from Funeral Director Daily sponsor Great Western Insurance Company.

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