Overview of Issues for Interim Charge Related to Insurance Funded Prepaid Funeral Contracts

1
Overview of Issues for Interim Charge Related to
Insurance Funded Prepaid Funeral Contracts

• Texas Department of Banking
• April 2008

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Prepaid Funeral Contracts

• Purpose of Chapter 154 of the Texas Finance Code
  (TFC)
• Provide a regulatory framework to give the public
  an opportunity to arrange and pay for funerals in
  advance of need.
• Provide all safeguards necessary to protect and
  assure that the prepaid funds are available at a
  future date to pay for prearranged funeral
  services.
• Two regulatory objectives to achieve purposes of
  Chapter 154
• Make sure a prepaid contract is performed in
  accordance with its terms, meaning the funeral
  goods and services selected by a purchaser are
  provided as specified in the contract.
• Make sure funds are available at a future date to
  pay for the contracted goods and services at the
  time of need.

3
Prepaid Contract Industry Statistics (As of
12/31/2006)

Number of Permits Number of Contracts Dollars
Trust Funded 362 365,349 910,043,426
Insurance Funded 56 456,251 1,970,922,913
TOTALS 418 821,600 2,880,966,339

• Insurance is total value of insurance policy/PFC
  contract while trust is amount paid in to date on
  contract.

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Options to Fund Prepaid Contracts
PrePaid Funeral Customer wishes to prearrange
and prepay for specific funeral goods and
services
Two options to fund the prepaid funeral
contract (1) trust-funded or (2) Insurance
funded
Trust Seller / Funeral Provider
Insurance Seller Subsidiary of Insurance Company
Funeral Provider
Financial Institution (funds deposited)
Insurance Company (issues insurance policy)
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Typical Sale of a Trust-Funded Prepaid Funeral
Contract
(1) Ms. Smith visits a funeral home and selects
the items for her funeral. Ms. Smith signs a
contract and pays the funeral home.
(2) A funeral home representative signs the
contract and deposits 90 of Ms. Smiths money
into a restricted bank / trust account for her
funeral when she passes away. The funeral home
can keep up to 10 of the contract price for its
overhead costs. The funeral home is also the
Departments permit holder.
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Typical Sale of an Insurance-Funded Prepaid
Funeral Contract
(2) If the agent is not an employee of the
funeral home, the agent is required to get the
funeral home to also sign the contract as the
provider only.
(4) The Permit Holder sends Ms. Smiths money and
application to the insurance company to issue the
policy to fund the contract. The insurance
company will typically pay the agent a sales
commission up to 30 of the face amount of the
policy.
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Concerns with Insurance Funded Prepaid Funeral
Contracts

• Insurance-Funded Permit Holders
• claim they have no responsibility or ability to
  maintain records or verify that a prepaid funeral
  contract (PFC) is properly honored at the time of
  need. No contractual agreements are made between
  the funeral provider and the permit holder.
• Example - At the time of need, a funeral
  provider who sold the prepaid contract as the
  insurance funded permit holders agent
  overcharges a family 500 for a casket specified
  and purchased on the prepaid contract. The
  insurance funded permit holder states it is not
  responsible for the actions of funeral providers
  and is not responsible to refund any overcharges.

8
Concerns with Insurance Funded Prepaid Funeral
Contracts

• Insurance-Funded Permit Holders
• have abandoned their permits, leaving no entity
  to maintain the records or take responsibility to
  verify that the prepaid funeral contracts are
  properly honored at the time of need.
• Examples - Magna Financial Services, Inc.
  abandoned insurance funded permit in 2001 with
  1,169 outstanding contracts representing a total
  death benefit of 4,087,660.
• IEIS Fidelity Plan, Inc. abandoned permit in
  2004 with 1,957 outstanding contracts
  representing a total death benefit of 6,948,575.

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Concerns with Insurance Funded Prepaid Funeral
Contracts

• The prepaid funeral contract is not linked to
  the policy.
• The policy is not required to pay any growth and
  can leave the funeral provider with less than
  sufficient funds to pay for the funeral at the
  time of need.
• There are no consumer disclosures that tell the
  purchaser
• He may be buying more insurance than is necessary
  to fund a prepaid funeral contract.
• Depending on his age, health and type of policy
  issued, he may pay substantially more than actual
  prepaid contract total.
• Cancellation cash surrender values are
  substantially less than amounts paid in.
• He may lose his policy benefits when he assigns
  the policy back to the permit holder.

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Total Death Benefits of Insurance Funded Prepaid
Funeral Contracts
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Number of Outstanding Insurance Funded Prepaid
Funeral Contracts