Final Committal Texas problems With Pre-Paid Funeral Services A report prepared by Consumers Union SWRO October 2000 available in pdf format

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Preneed Funeral Arrangements Many Texans hope to help their families by arranging and paying for their funerals well in advance. An AARP national survey found that 43 percent of people age 50 or older report being solicited about preneed funeral arrangements, and 36 percent report having paid in advance for either funeral or burial arrangements. Preneed contracts can cover everything from coffins and memorial services to cemetery plots and headstones. There are even “associations,” such as the National Cremation Society and the Medical Air Services Association, where membership benefits include cremation or payment for the flight of a body.(15) In general, preneed contracts cover most aspects of a funeral and may be financed through an insurance policy, a trust fund arrangement, or may even be purchased like an appliance using a retail installment contract. Preneed contract are regulated by different agencies, depending on the finance mechanism. The Banking Department regulates trusts while the Insurance department oversees insurance policies and the Consumer Credit Commission regulates retail installment contracts. Texas law give consumers different rights depending on the type of preneed arrangement purchased. Further, insurance backed preneed arrangements may be backed by a whole life insurance policy or an annuity, each with its own rules. Inflation Protection Consumers purchase preneed insurance in part because funeral homes say that pre-arrangement will lock in today’s prices for tomorrow’s funeral--a “guaranteed” contract. Preneed contracts are a hedge against inflation. If funeral prices inflate faster than a consumer’s investment would grow in an ordinary long term investment account, including the effect of compounding interest, then preneed contracts may offer a true value. Bureau of Labor statistics indicate that funeral prices have been rising faster than current inflation rates since 1990. Funeral costs increased 3.9% in 1998 over 1997 levels.(16) While this inflation rate is significant, we note that it is lower than the compound interest rates available through many secure long-term investments. At current average interest rates, a consumer who puts money in a five year CD earns 6.7% annual percentage yield. Five year CD’s can be purchased with as little as $100, and a Texas consumer investing at least $1000 can purchase a 5-yr CD earning 7.25% or more. Money market accounts earning over 6% are available in most Texas cities with a minimum deposit of either $100 or $1,000.(17) Most preneed contracts place payments in a trust account, and the consumer pays monthly or annually until the original funeral cost is paid in. The funeral home bets that the interest on the trust will more than cover funeral inflation. Sometimes, however, preneed contracts lock-in today’s prices by requiring the buyer to pay substantially more over time than the cost of today’s funeral (see story, pp. 12-13). In addition, aggregate inflation estimates for the funeral industry as a whole, as well as average price estimates, mask significant price variation at any given time. We reviewed price sheets for funeral services and found that a basic funeral using the lowest priced casket ranged from $2,400 to $7,005. Prices from some funeral companies in 1997 were higher than current prices from other companies. In Austin, prices on individual items like the funeral service fee, embalming or visitation time vary by hundreds of dollars (see table for low and high values on individual items). (18) If a consumer elects to place money every month in a long term investment account, not only will there be more money at the end of the line, but the family will be able to choose among funeral providers and services and spend that money in the most effective way. Partial Cancellation nlike the flexibility of a CD, preneed funeral contracts lock families into a single arrangement with a particular funeral company. Once a preneed policy is written, any changes to the funeral arrangement itself can void the contract or create problems accessing benefits. Such modifications (contract language calls this “partial cancellation”) include changing caskets, using a different funeral home, or switching from burial to cremation.(19) Once a contract is altered, the funeral home does not have to honor the original prices and any hedge against inflation is lost. Pearl W. of Conroe Texas purchased a prepaid funeral insurance policy from Mission Life in 1980. In 1999, the family was surprised to discover that the prepaid funeral contract didn’t cover the cost of the Funeral Director and assistant, the chapel, the music, the stateroom for viewing, the flower van, the police escort, the limousine, the hearse or the graveside services. According to the insurance company, this was because the family had elected to change funeral homes. “The prepaid funeral contract laws provide that a contract cannot be canceled in part,” wrote Mission, attaching a copy of the statute. “The funeral provider could have charged current prices for the services provided, because of the family’s desire to change the pre-planned service.” The original funeral home used the proceeds from the insurance for a casket, dressing the body, and transportation to the new home. The family had to pay an additional $2,442 to the second funeral home for the actual funeral service. (20) If a family elects to use a different funeral home, this change can significantly reduce the value of a preneed contract funded by a trust, as well. If a family changes funeral homes, the original home may keep 10 percent of the amount paid in, and transfer to the new funeral home only the remaining 90 percent of the “face amount” of the originally purchased funeral service, NOT principal plus interest. (21) And the new funeral home may charge current prices. In 1971, John and Dorothy B. of Abilene agreed to prepay for a funeral, and purchased a contract with a face amount (funeral cost at that time) of $1005. They paid $15.50 per month into a trust account with the funeral home until the contract price was paid in full. When Mrs. Blocker died in 1999, the trust account should have contained enough money—due to the compound interest earned over 28 years—to pay for a funeral, but the family elected to use a different funeral parlor. The funeral company holding the trust first stated that they would pay principal and interest to the new funeral home, and the family proceeded with arrangements. Halfway through the process, the new funeral home learned that it would receive only principal and no interest from the trust account (the $1005 “face amount” of the contract). Suddenly the family owed thousands of dollars, and the interest on the account had evaporated. “If Mom had just put $5 a month in a savings account on January 2, 1972, instead of the Preneed Funeral Arrangements,” her son wrote to the Funeral Services Commission, “at only 5 percent interest there would now be over $3,400. … It is going to be my cause in life to inform the public not to purchase a “Preneed” policy, but to put their money in a savings account.” (22) Recommendations: Texas legislators should: eliminate the 10 percent “retention” that funeral homes may keep from the payment consumers make into the trust, and instead determine a reasonable administrative fee since no services have been provided; require trust accounts to be payable in full--principle and interest, less this nominal administration fee--to a new funeral home if the family elects to change funeral providers; and require disclosure to the consumer on an annual basis the amount of principal and interest and the annualized rate of earnings for any trust funded preneed contract. Items not Covered Consumers in Texas also wrote to various state agencies about the unexpected extra charges for interment, and other items not covered under preneed contracts. Preneed funeral contracts typically do not cover cemetery products and services like vaults or interment (putting the body in the grave), and fees for flowers or document handling. Consumers with preneed contracts wrote to complain about additional fees for death certificates, insurance, extra liners, and more. (23) Investment Values Generally Build Faster than Funderal Inflation Consumers who pay monthly into an acount over ten years with no downpayment may not keep up with funeral inflation But most of all, they wrote about interment charges. “Opening and closing” charges often fall outside the contract because they are part of a cemetery’s costs, not the funeral home’s costs, and independent cemeteries were often not licenced to sell preneed services. As large corporate funeral home companies buy cemeteries, the new owner (having a preneed license) may solicit customers who already purchased crypts or plots to pre-pay for “opening and closing.” Those customers who thought they had already covered all the costs of the funeral and burial were shocked to discover that these additional charges can range from $800 to $1,000. (24) Joe and Janette Young of Dallas purchased crypts for $795 and preneed contracts for $2,487.00 in 1965. According to their complaint to the AG, the saleswoman told them the contract was “all inclusive.” In 1999, the company wrote to the couple to tell them that their pre-paid contract did not cover “opening and closing of the mausoleum crypt,” and they could now purchase this service for an additional $1700. They went to a lawyer, who noticed that their contract specified a list of services plus “many other items.” “If you sell this standard funeral service, the casket, and the crypt,” their lawyer wrote to the company, “and the “many other items” does not include putting the casket in the crypt at the standard funeral service, just what does the “many other items” include?” (25) The attorney calculated that their 1965 investment, earning 10% per annum compounded monthly, should now be worth about $96,000, more than enough to inter two people in considerable luxury at any funeral home and cemetery of their choice (see table of investment values, p. 15). The company dropped the fee. Current Texas law requires preneed contracts to be in writing, and state the benefits to be provided under the contract (including the materials used in caskets or vaults). Most contracts reviewed for this report were in very small print and did, in fact, disclose exactly the services that were covered under the contract. Some contracts clearly disclosed services not covered as well. In other cases, a consumer would need to have previous experience with funerals to know the additional services that would not be covered. Recommendations: Texas legislators should: standardize written preneed contracts in at least 10 point type; include in the standard contract disclosure of services not covered and a statement that these non-covered services can add significantly to the cost of a funeral. _____ Notes: 15 Testimony of Robert Shreve, Chairman of the Board, AARP, before the Special Committee on Aging, April 10, 2000; Office of the Attorney General, Consumer Complaint File H9903-0349 and M9809-0048. 16 General Accounting Office, Funeral Related Industries: Complaints and State Laws Vary, and FTC Could Better Manage Funeral Rule, GAO/GGD-99-156, September 1999, p. 5. 17 “Today’s National Averages from Bank Rate Monitor,” Bankrate.com, June 9, 2000. 18 Consumers Union collected FTC required current price sheets from funeral homes in the central Austin area during the week of June 12 to 16, 2000. We also reviewed price sheets included in consumer complaint files from around the state. 19 Tex. Fin. Code, Title 3, Subtitle E, Section 154.155(c). 20 Consumer Complaint File TDI 394471. 21 Tex. Fin. Code, Title 3, Subtitle E, Section 154.254. 22 Office of the Attorney General, Consumer Complaint File A9909-0059. 23 Funeral Services Commission, Consumer Complaint Files 98-028, 99-160, 99-108. 24 Funeral Services Commission, Consumer Complaint File 99-015, Office of the Attorney General, Consumer Complaint Files M9807-003, D9803-0580, S9802-0288, L9803-0044. 25 Office of the Attorney General, Consumer Complaint File D9904-0110.