In our last post, we used Allan Sloan’s article on the Treasury bond market to highlight the investment exposures to death care trusts. Today we will look at how the Treasury market is also impacting funeral homes that rely upon insurance for preneed funding. Mr. Sloan’s article alluded to insurance companies being required by statute to invest reserves in fixed income securities that include Treasuries. Inflated Treasury prices and extremely low yields have forced preneed insurers to drop their policy death benefit increases to below 2%. Some policy increases are now below 1.5%.
While some funeral homes will embrace any funding vehicle that avoids the potential for investment loss, most of those same funeral homes are facing internal cost increases in excess of 3%. Consequently, insurance products are not keeping pace with funeral homes’ costs to perform a preneed contract. To minimize a funeral home’s exposure to preneed shortfalls, insurers are recommending that the funeral home include a surcharge based on the sales price of the prearranged funeral. The percentage differs by program, but some have been as high as 19%. Despite what may seem to be an exorbitant charge to impose upon the consumer for a guaranteed price contract, many funeral homes may still suffer an investment loss on that contract.