contract seller a sum of money, either on an installment payment plan or in a single-payment transaction. The preneed contract seller is then required by law to place a percentage of these funds in a trust account with a qualified trustee. Both the NFDA and the FCA suggest that 100% of the funds be placed in trust, though state requirements vary. Bank-held trusts Bank-held trusts or savings accounts are accounts that are established to pay for funeral expenses. It is up to the customer to let his or her family and the funeral provider know about the money in the account. The cost of funeral services and merchandise is usually not guaranteed with this type of account. Totten trusts Totten trusts (also known as “Payable on Death” accounts) are created when one party, the “settlor,” puts money in a bank account. Instructions, which name a beneficiary, are provided, and the beneficiary receives the money when the settlor dies. The trust money does not go through probate. AARP and other groups recommend a Totten trust, in some cases, as preferable to preneed contracts. Advocates of Totten trusts note cases where funeral homes have shut down or changed ownership and refused to honor a preneed contract. One disadvantage of a Totten trust is that if the beneficiary dies before the settlor, the gift lapses; no money remains. In addition, when a person with a Totten trust dies, the beneficiary must quickly contact the funeral home and make arrangements, especially if the person has not preplanned. Preneed contracts eliminate this stress; the funeral director takes care of all required procedures and the customer has chosen much of the merchandise or services he or she desires. Also, the beneficiary will likely pay more for the funeral than under a preneed contract. Finally, since Totten trusts are revocable: they cannot be used for Medicaid asset spend-down. AARP and other groups also state that preneed contracts have historically been invested poorly, thus yielding low returns. For example, one very large funeral home ran into financial trouble when it bought up independent homes whose investments were losing money. However, many states have addressed this issue by adopting rules that have tightened investment requirements; they specify how and where assets must be invested and prohibit the funeral director from acting as trustee. amount. Otherwise, most states specify that the customer has a choice of paying up-front or in installments. Most states stipulate that the funds must be entrusted to a financial institution or financial depository; some states specify that the trustee act prudently. A typical example is Massachusetts: Chapter 203C: Section 3(a): “A trustee shall invest and manage trust assets as a prudent investor would, considering the purposes, terms, and other circumstances of the trust, including those set forth in subsection (c). In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.” The section goes on to list circumstances trustees must consider in each individual case. With life insurance, the purchaser is not taxed for interest income earned. However, the rate of return is usually lower than that of trust funds. Providers often receive a commission from the insurance company. A few states,
Advanced planning options include life insurance, final expense policies, funeral insurance, and funeral trusts. Each method has its own advantages and disadvantages. Life insurance A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured’s death. Under the insurance-funded preneed contract, the consumer purchases a life insurance policy, and the policy proceeds are used to pay for the funeral. The funeral home is most times the insurance policy assignee and is paid directly by the insurance company after performance of the preneed contract. All cost increases incurred by the funeral home at the time of need are paid out of the benefits from the life insurance policy, up to the seller’s current price list. It is important to note that these arrangements involve two separate contracts: the preneed contract and the life insurance contract that is used to fund the preneed contract. Final expense policies Final expense policies are specifically designed to provide extra money to the decedent’’s family to cover his or her final medical expenses, burial costs, estate fees, or other costs incurred with the decedent’s death. At first glance, there appears to be very little difference between a final expense life insurance policy and an insurance-funded preneed contract, since both products provide death benefits to pay for funeral costs. However, there are two differences: First, final expense policies cannot be assigned to a particular funeral home. Second, the final expense policy must state that the policy’s death benefit proceeds are not guaranteed to be adequate to pay for all funeral needs. Funeral insurance Funeral insurance can be purchased as a preneed contract in an amount to pay for services, merchandise, and cemetery costs. If the costs are guaranteed, the insurance should cover all the expenses. Before funeral insurance is purchased, the customer should be told, in writing, exactly how much will be paid and what will happen if the insurance premiums are not paid. Trust-funded preneed contracts With a trust-funded preneed contract, a consumer purchases specific funeral services and merchandise at a guaranteed price from a preneed contract seller. A written contract that details the types of services and/or merchandise being purchased is required. The consumer pays the preneed Trust or insurance? Consumer groups recommend that a funeral home provider offer both trust and insurance plans, letting the customer choose which option will work out best for him or her. In addition, the FCA suggests that the funeral provider or agent clearly lay out how much the trust and the insurance option would cost, using a hypothetical $5,000 funeral. This example would include how much the consumer would receive if he or she cancelled after one, three, five, and ten years, as well as the amounts of consumer funds that any other party receives. State-regulated trusts used to be the most common form of advanced planning financing. The customer pays the provider, and the funds are placed into a special account. The interest pays for the increased cost of the funeral, also known as the inflation, between the “lock-in” purchase time and the time of the funeral. If a customer is applying for Medicaid, he or she will need to render the money irrevocable by paying the funeral cost in a lump sum
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Book Code: FIL1225
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