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Preneed Funeral and Burial Agreements

Table of Contents: Introduction | Trends in the Industries | Regulation of Preneed Agreements | Case Study | FTC's Funeral Rule

Introduction

More and more Americans are entering into preneed agreements to purchase funeral and burial goods and services prior to death. Currently, funds in preneed agreements exceed $25 billion, up from $18 billion in 1995.1In a recent AARP survey,2 two in five persons age 50 and older reported that they had been contacted about the advance purchase of funerals (43%) or of burial (39%) goods and services. There is currently no federal regulation of the growing preneed industry.

Preplanning vs. Prepaying
Some individuals preplan for their own funerals and burials by comparing prices, discussing plans or leaving instructions with family, or making decisions about funeral and burial goods and services that do not require payment in advance. Some individuals may also preplan by setting aside money in a bank account for the future purchase of funeral and burial goods and services by the appropriate survivor.

Individuals prepay for funerals and burials by entering into a preneed agreement, or contract, to pay in advance for goods or services they will receive upon death. Generally, this agreement is between the individual and the funeral director or cemeterian, and is funded through a funeral trust, annuity, or insurance policy. At the time of the agreement, a third party - typically a trustee or insurance company - assumes responsibility for the management of the funds. Thus, the individual often loses access to the funds upon signing the agreement, and can regain access to the funds only through the termination of the agreement. Upon the individual's death, the funds are used by the representative of the funeral home or cemetery to provide the designated goods and services.


Trends in the Industries

Integration of Funeral and Burial Industries
Traditionally, funeral directors provided funeral goods and services, and cemeterians handled goods and services for burials.3 Increasingly, funeral directors provide goods and services once exclusive to cemeterians; likewise, cemeterians sell items that were once exclusive to the funeral industry.

In the past, preneed agreements often included only cemetery plots and, therefore, were primarily sold by cemeterians. Preneed agreements are now likely to include a package of both funeral and burial goods and services that may be sold by funeral directors or cemeterians.

Increase in Large Chains
Large chains are increasingly buying local funeral homes and cemeteries.Major commercial chains now account for approximately 30 percent of the country's funeral business.4 These large chains actively market and sell preneed agreements.

Third Party Sellers
Increasing numbers of third party sellers are selling preneed agreements. Third party sellers are persons who, traditionally, have sold caskets, headstones, and other funeral and burial products. While third party sellers are neither funeral directors nor cemeterians, in states that allow third party sellers to sell preneed agreements, they are subject to the same preneed agreement regulations that apply to licensed funeral homes and cemeterians.

Location of Preneed Funeral and Burial Agreement Funds
About one third (32%) of the respondents in the AARP survey reported that they had prepaid, or were in the process of prepaying, for funerals or burials. Of this group, 86% had prepaid for cemetery plots, mausoleums, or niches; 58% had paid for other burial goods or services (such as headstones, grave vaults or liners, urns, vault openings and closings); and 40% had prepaid for funeral services.

Preneed agreement funds are held in a variety of locations. Figure 1 shows that, of respondents who had prepaid for funerals, 30% had funds in trust and 30% had funds in life insurance policies.

Figure 1. Location of Prepaid
Funeral Funds
Figure 1. Location of Prepaid Funeral Funds
Source: AARP. (1999). Older Americans and Preneed Funeral and Burial Arrangements: Findings from a 1998 National Telephone Survey.
Prepared by AARP Public Policy Institute

Figure 2 shows the location of respondents' prepaid cemetery funds. Of respondents who had prepaid for burials, 60% stated that they held title to a cemetery plot, and 15% that they had money in a life insurance policy.

Figure 2. Location of Prepaid
Cemetery Funds
Figure 2. Location of Prepaid Cemetery Funds
Source: AARP. (1999). Older Americans and Preneed Funeral and Burial Arrangements: Findings from a 1998 National Telephone Survey.
Prepared by AARP Public Policy Institute


Regulation of Preneed Agreements

Regulating the sale of preneed funeral and burial agreements is more complicated than regulating the sale of many other types of consumer products. A primary complication involving preneed agreements is the length of time between the signing of the agreement and the need for the goods and services described in the agreement.5 If, for example, trust funds are mishandled after the signing of the agreement, such mishandling may go undetected for years. In addition, it is often difficult to determine whether specific provisions of the contract were executed (type of casket, for example), since the person who signed the contract is deceased.

No federal legislation, including the Federal Trade Commission's (FTC) Funeral Rule (see page 4), specifically addresses the sale of preneed agreements. State laws and regulations governing the preneed industry are inconsistent across the states. In addition, many cemeteries, such as religious and municipal cemeteries, are exempt from state regulation.

State Preneed Regulations
State regulations have generally addressed: 1) licensure requirements for sellers of preneed goods and services, 2) requirements of funds in trust, 3) contract provisions and cancellation requirements, and 4) consumer protection recovery funds. These regulations vary in scope, approach, and requirements. 6

Every state except Alabama has a law governing the sale of preneed funeral and burial contracts. Twenty four states regulate both funeral and burial contracts in a single statute, 11 states have separate preneed funeral and burial contracts, and the remaining 14 states have a single statute that covers only preneed funeral contracts. 7 Depending on the scope of the state statute, the law governs goods and/or services.

Licensure Requirements
State laws vary as to who can sell preneed contracts (funeral home or cemetery representatives, or third party sellers) and whether a separate preneed license or permit is necessary. If the preneed contract is funded with an insurance product, some states require that the seller be a licensed insurance agent. Only five state laws specify that state unfair and deceptive acts and practices (UDAP) statutes apply to the sale of preneed agreements.

Trust Fund Requirements
The percentage of individual preneed funeral agreement funds that funeral directors are required to put into trust varies across the states. Most states require that 90% or more of the proceeds of the sale of funeral preneed agreements be placed in trust. Some states have no such requirement. Other states have requirements ranging from 40 percent to 100 percent.

Among those states that require trusting for preneed cemetery agreements, funding amounts range from about 30 percent to 100 percent. In more than 30 states, 75 percent or less of preneed cemetery agreement proceeds must be placed in trust by the seller.

Contract Provisions and Cancellation Requirements
State preneed laws contain different requirements regarding the form and content of preneed contracts. Some states only require that the contract be in writing and include the names of the parties and the terms of the agreement. Other states specifically require standard disclosures, easy-to-understand language, and large font print.

The procedures for canceling a preneed funeral or burial contract vary from state to state, as does the amount of money that is refundable to the purchaser upon cancellation. Only a minority of state laws requires that the preneed contract include a specific disclosure about the purchaser's right to cancel. Individuals who relocate, decide they prefer another funeral home or cemetery, or want to cancel their agreement may not be able to transfer or cancel without a penalty. In some cases, individuals could lose significant amounts of money.

Consumer Protection Recovery Funds
Recovery funds are established by states as a way to make funds available to consumers who have been defrauded or have experienced a breach of contract. Currently, eight state laws have a consumer protection recovery fund for preneed funeral and/or burial agreements. States that establish recovery funds generally require that sellers of preneed agreements pay a fee for each agreement sold, with the fee based on the value of the contract. The fees placed in the recovery fund are used to compensate a preneed buyer when a seller who has breached the preneed contract has insufficient funds to provide a refund.


Case Study

Preneed Sales in Washington State
While it is known that the number of preneed agreements is rapidly increasing, detailed national data are not available. States may collect information about the sale of preneed agreements, but the amount, type, and availability of the data vary widely. Because Washington has collected and examined data that track the growth of the industry, this state's experience provides valuable insight into the preneed funeral and burial industries. Figure 3 exhibits the dramatic growth in the amount of money that residents of Washington have placed in preneed funeral trust funds in recent years. This amount grew 155 percent between 1988 and 1997 and is currently estimated to total more than $70 million.

Figure 3. Preneed Funeral Service Trust Funds
(State of Washington, 1988-1997)
Figure 3. Preneed Funeral Service Trust Funds (State of Washington, 1988-1997)
Source: State of Washington, Department of Licensing, June 1998.
Prepared by AARP Public Policy Institute

There was similarly a dramatic increase in the amount of money Washington residents have prepaid for cemetery goods and services during the same period. Figure 4 shows that funds in preneed cemetery agreements increased 158 percent between 1988 and 1997. Currently, over $35 million is held in cemetery trust funds in Washington.

Figure 4. Cemetery Trust Funds
(State of Washington, 1988-1997)
Figure 4. Cemetery Trust Funds (State of Washington, 1988-1997)
Source: State of Washington, Department of Licensing, June 1998.
Prepared by AARP Public Policy Institute



FTC's Funeral Rule

The Federal Trade Commission's (FTC) Funeral Rule specifies that consumers are entitled to price information about funeral goods and services, whether they are inquiring by telephone or in person. Funeral homes are required to give individuals a general price list (GPL) that can be used for comparative shopping.

Since the Rule applies only to persons providing both funeral goods and services, it does not apply therefore to cemeterians or third party sellers. Moreover, the Rule does not cover trust funds established through the sale of preneed funeral and burial agreements. In addition, there are no federal minimum standards for preneed funeral and burial contracts, nor is there a federal requirement for full disclosure of preneed contract terms and conditions and the risks consumers bear if they cancel a contract.

The Funeral Rule is scheduled to be reviewed by the FTC in 1999.



Footnotes

1 Committee on Aging Sics GAO on Preneed, Preneed Perspective, Vol 5, Issue 11, Nov 1998.
2  Older Americans and Preneed Funeral and Burial Arrangements: Findings from a 1998 National Telephone Survey. AARP. (1999). Results reported in this publication are from a telephone survey of 620 respondents age 50 and older conducted in September 1998.
3  A typical funeral includes a combination of goods (caskets and outer burial containers) and services (services of the funeral director, care of the body, transportation, use of facilities, and alternative arrangements). A burial typically includes both goods (markers) and services (opening and closing of the grave and perpetual care).
4  Carlson, L. (1998). Caring for the Dead: Your Final Act of Love. Hinesburg, VT: Upper Access.
5  Frank, J. (1996). Preneed Funeral Plans: The Case for Uniformity. Elder Law Journal. Spring 1996.
6  Different regulatory standards for funeral homes and cemeteries persist despite the fact that cemeteries increasingly offer many of the same goods and services as funeral homes.
7  AARP. (1999). Preneed Funeral and Burial Arrangements: 1998 Survey of State Laws. Washington, DC. No. D16956.


Written by Sharon Hermanson, AARP Public Policy Institute
June 1999
©1999 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

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