Funding Pre-Arrangements Explained

Are you ready to make pre-arrangements with a funeral home? Did you know, state and federal consumer protection laws do not allow funeral homes to collect money for goods and services that will be delivered at a future date. Instead, a funding vehicle needs to be established. The most common funding vehicle for this is a whole life insurance policy known as a Final Expense Insurance Policy. When someone is putting together their pre-arrangements with a funeral home, they work with a team member licensed to sell life insurance. Both funeral directors at Wildflower Funeral Concepts are licensed to sell life insurance for this purpose. 

When making pre-arrangements you can select all the goods and services that fit your needs from the funeral home General Price List as well as provide allowances for items offered by outside entities such as death certificates, newspaper obituaries, flowers, clergy honorariums, catering for a reception, etc. The total cost of these goods and services is paid to the insurance company as a premium. This amount then becomes the death benefit (the amount the insurance policy pays out after death) of a small whole life insurance policy. The insured owns the policy. It is their asset. It is assigned to the funeral home. After death the assigned funeral home files the insurance claim and receives the funds directly. Any unused funds are returned to the deceased’s family. 

How Does the Death Benefit Grow?

The death benefit of a whole life policy grows over time. The insurance company invests the money they received from the insurance premium, and they must share some of the returns on those investments with the insured. It is the insured’s money that is being invested after all. This growth in a Final Expense Insurance Policy accounts for and hedges against inflation of the funeral home’s goods and services. Because of this, Wildflower Funeral Concepts is able to guarantee the cost the goods and services that they provide. If the money in the insurance policy does not grow enough to cover Wildflower’s cost increase over time, we discount our goods and services to honor that guarantee. This is mandated by state and federal law. 

When money is placed into the Final Expense Insurance Policy for items provided by a third party, (things like death certificates and newspaper obituaries) these are considered Non-Guaranteed Cash Advance items. Because these funds within the insurance policy are designated for third parties that Wildflower has no control over, we are not able to guarantee them. Meaning, if there is not enough money in the portion of funds designated for Non-Guaranteed Cash Advance items to pay for all of those outside costs, there will be some out-of-pocket expenses for the deceased’s family. On the other hand, if there is more money designated for Non-Guaranteed Cash Advance items than is needed, the excess funds are returned, even if Wildflower had to provide a discount to honor our guaranteed goods and services. 

By way of example… 

Example Scenario: Mrs. Smith

Please note, these dollar amounts are chosen for ease of calculations and do not necessarily reflect actual pricing. 

Mrs. Smith wrote her prearrangements with her local funeral home for a simple cremation that costs $3000, and for 10 death certificates that cost $250 (1 death certificate costs $25). The total cost is $3250. Rather than give the funeral home $3250, Mrs. Smith makes a single premium payment of $3250 to an insurance company that the funeral home represents and is an agent for. $3000 is designated for the funeral home’s simple cremation and is guaranteed. $250 is designated for the 10 death certificates to be purchased from the local health department and is non-guaranteed. 

Mrs. Smith lives for another 10 years, during which her Final Expense Insurance Policy grows by 2% a year. When she dies, the death benefit has grown from $3250 to $3900. With this growth now $3600 is designated for the guaranteed simple cremation and $300 is designated for the non-guaranteed 10 death certificates. Over the last 10 years, the funeral home charge for simple cremation has increased to $3800 and death certificates are still the same price from the health department, $25 each. Mrs. Smith’s family has determined that they will actually only need 4 death certificates at a total cost of $100. The insurance policy has not grown enough to cover the funeral home’s cost increase for simple cremation, so the funeral home discounts their services by $200. But there is $200 left over in the non-guaranteed portion of funds because the cost of death certificates has stayed the same and Mrs. Smith’s family is only getting 4, not 10. That $200 is refunded to the family and cannot be applied to the funeral home’s discount. This is mandated by state and federal laws. 

It is worth noting again that a Final Expense Insurance Policy is owned by the insured and assigned to chosen funeral home. The insured can change that assignment at any time. If they move to another state, they can find a funeral home near their new residence and reassign the insurance policy to them. The insurance policy is the insured’s asset. They own it and they control it, not the funeral home.