Pre-Arrangement Operations in the Cremation World

Back in the 1990s as our State of Minnesota began allowing insurance policies to be a repository for pre-need funeral arrangement funding, many funeral homes, mine included, started insurance agencies in order to profit from the decision.  Since, Minnesota is a 100% trusting state, prior to that decision if a family gave you $5000 to pre-arrange a funeral, all $5000, 100% of what you were given, had to be put in a certificate of deposit.  Since it was all put into the bank, you received no remuneration for the pre-arrangement,  it left you to fund your pre-arrangement business out of your funeral business.

Once we were allowed to use an insurance based product, 100% could still be trusted with the insurance company, but that company paid a commission to the agent/funeral director/agency to procure that business.  A lot changed at that time because it gave funeral homes a cash-flow to hire someone to push pre-need exclusively and also provided some funding to market pre-need without taking it off the bottom line of the funeral home business.  It was a welcome change and the funds provided could bolster your bottom line.

A lot of funeral homes hired a designated “Pre-Arrangement Agent/Specialist” at this time.  Going back into that world and using today’s dollar values – a world that had only a 10-20% cremation rate – a small funeral home might pre-arrange 100 future clients at an average value of, let’s just say, $8000.  That’s $800,000 in premium and if the agency/agent received a 6% commission it brought in $48,000 to pay that person.

Let’s fast forward to today when many of those same funeral homes are approaching a 60% cremation rate.  If many of those are direct cremations, depending on the funeral home’s pricing, you may be looking at 100 pre-arrangements at about a $6000 average premium (and I think this might be generous).  That would only bring in, at the same 6% rate, $36,000 to pay the pre-arrangement person.

While my numbers here are not scientific, I think the thought process is. . . .as cremation percentage rises and you pre-arrange the same number of future clients, I believe that there is a great chance that you will be bringing in less commission for roughly the same amount of work.  So, the bottom line is that the funeral home may, once again, have to subsidize the pre-arrangement business just as in the days of 100% certificate of deposit trusting.

Funeral homes are great businesses and can yield great profits and ownership can provide perks that are hard to beat.  However, this trend is just one more headwind that owner/operators have to face as they also see less revenue per case from their at need business today as well.

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1 Comment

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