Preneed FAQs - Companies
Insurance FAQ Main Page
Click on a link below to see those type of Frequently Asked Questions and Answers.
General Questions
Q. What is a “preneed contract”?
A. The Department considers a “preneed contract" to be a written contract (1) entered
into on a “preneed basis” (before the buyer’s death); (2) under which the buyer
pays to the seller, before need and in whole or in part, a purchase price for funeral
or cemetery merchandise and services; and (3) under which the seller receives beneficiary
status or ownership rights in a financial mechanism like a life policy or annuity
or a deposit of funds like a bank account, certificate of deposit, etc.; and (4)
under which the seller is not obligated to deliver the contracted for merchandise
or perform the services, in whole or in part, until need. The Department’s position
is discussed in the Bulletin dated August 21, 2008.
Q. Does this include the preneed sale of interment (burial) rights?
A. No, a written contract for the sale of an interment (burial) right only is not
a preneed contract even if the sale occurs before death. If sale of an interment
right is combined with sale of other services and merchandise on a preneed basis,
the entire transaction is a preneed contract.
Q. Who must obtain a certificate of authority?
A. Any “persons” - an individual, a business entity or organization, or a government
or governmental agency - selling funeral or cemetery merchandise or services pursuant
to preneed contracts must have a current valid certificate of authority. A cemetery
authority owned or operated by a governmental agency or religious institution does
not need a certificate of authority. ALA CODE - §27-17A-10(d).
Q. Do sellers of memorials need a certificate of authority if the memorial is delivered
to the purchaser?
A. No. In general, transactions which are current sales – the buyer pays and the
seller delivers or performs upon payment – are not preneed contracts. See Bulletin
dated August 21, 2008 for further Examples.
Q. Who is eligible to obtain a certificate of authority?
A. Only a licensed funeral director, licensed funeral establishment, cemetery authority
or third party seller may obtain a certificate of authority. Only licensed funeral
directors or licensed funeral establishments can sell funeral services preneed.
Licensed funeral directors, licensed funeral authorities, cemetery authorities,
and third party sellers can sell funeral merchandise and cemetery merchandise preneed.
Q. Does each licensed funeral director, licensed funeral establishment, cemetery
authority, or third party seller owned by the same corporation, partnership or sole
proprietor need a separate certificate of authority?
A. Not in all cases. The Act provides that where a person selling preneed funeral
or cemetery merchandise or services is part of “common business enterprise” and
wishes to operate using a different name than that used by the certificate holder,
then, if the requirements set forth in the Act are met, that person can be authorized
to sell preneed as a “branch registrant”. The Act requires that the branch registrant
meet all requirements of a certificate holder EXCEPT that the branch registrant
need not demonstrate that, standing alone, it can pay its liabilities as they become
due during the ordinary course of business and also need not show that it has sufficient
funds available during the calendar year to perform its obligations under outstanding
preneed contracts. All branch registrants must be affiliated with a certificate
holder.
Q. If an entity operates both a funeral establishment and a cemetery authority,
does it need only one certificate of authority and one financial statement?
A. Yes. If the funeral establishment and cemetery authority are part of the same
legal entity and operating on the same property, only one certificate of authority
is required.
Applications and Financial Reporting
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Q. Must the financial statement filed with the application for or renewal of the
certificate of authority be filed on the forms provided by the Department?
A. At the preneed entity’s option, the financial statement shall be (1) a compilation,
review or audit report from a licensed certified public accountant prepared in conformity
with GAAP; or (2) in the form set forth in Rule 482-3-0010.05(6) and its appendix
using the alternative basis specified in that Rule. The financial statement must
demonstrate the level of equity shown in that Rule.
Q. Does the financial information required for the certificate of authority need
to be audited?
A. No; however, every effort should be made to make sure that the financial statement
is a complete and accurate record of the financial condition of the proposed or
current certificate holder.
Q. Does the financial statement have to include assets and liabilities for preneed
contracts written prior to May 1, 2002? Is there a difference in the method
of computing the prelaw liabilities and the post-law liabilities?
A. Yes. For prelaw contracts, a preneed deferred revenue liability is required to
be recorded on preneed funeral and/or cemetery merchandise and services. That prelaw
liability must be calculated at the preneed entity’s current cost of providing all
funeral and/or cemetery merchandise and services for each contract. For post-law
contracts, a preneed deferred revenue liability is required to be recorded on preneed
funeral and/or cemetery services and merchandise. That post-law liability must be
calculated at the preneed entity’s retail value at the time of sale for all funeral
and/or cemetery merchandise and services for each contract.
Q. If life insurance is used to fund a preneed contract, what amount must be recorded
on the financial statement?
A. A preneed receivable must be recorded for the face amount of the life insurance
policy and a preneed deferred revenue liability must be recorded for the face amount
of the life insurance policy.
Q. The financial statement that must be sent with the application for or renewal
of a certificate of authority must be current as of what date?
A. The financial statement must be current as of the end of the last fiscal year
end of the preneed entity. Otherwise, the financial statement must be current as
of the end of the prior calendar year for which application or renewal is being
made. In other words, if application for or renewal of the certificate of authority
is being made for calendar year 2008, the financial statement must be current as
of December 31, 2007.
Q. Both the application for or renewal of a certificate of authority and branch
registration forms, as well as the historical sketch of principals forms attached
thereto, inquire as to whether the applicant (or principal) have previously been
the subject of a bankruptcy proceeding. Does a “Yes” response to this question disqualify
the applicant?
A. No; however, additional information must be provided. If this previous bankruptcy
proceeding was in no way associated with the business of insurance or preneed funeral
or cemetery business, you may complete the affidavit below in lieu of filing a more
detailed explanation.
Bankruptcy Affidavit - Word -
PDF
Preneed Sales Agents (also see Use of Life Insurance as a Funding Mechanism)
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Q. When must a preneed sales agent registration form be completed and what is the
fee for the registration?
A. Each individual offering preneed contracts to the public or signing preneed contracts
on behalf of a certificate holder must be registered with the Insurance Department
as a preneed sales agent prior to selling or soliciting preneed contracts. The fee
for each preneed sales agent registration is $25.00. The preneed entity is not entitled
to one free sales agent registration.
Q. If a preneed entity satisfies the Act’s security requirements by placing funds
paid pursuant to a preneed contract in trust, must the preneed sales agent be registered
pursuant to the Act?
A. Yes. Regardless of the method of funding the preneed contracts, all preneed sales
agents must be registered.
Q. Do persons selling preneed contracts for interment (burial) rights have to be
registered as preneed sales agents?
A. No, if the preneed entity sells only interment rights or other merchandise and
services that are not subject to the Act because the transaction does not result
in a preneed contract (see Q2 above and Bulletin dated July 29, 2008. Yes, if the
preneed entity sells preneed contracts subject to the Act.
Q. Can a preneed sales agent represent or sell for different funeral directors,
funeral establishments, cemetery authorities, third party sellers, or their branch
registrants at the same time?
A. Yes. However, the preneed sales agent must be registered as a preneed sales agent
with each certificate holder for whom he or she sells preneed funeral or cemetery
contracts. The preneed sales agent must have written consent from each certificate
holder that he or she represents.
Trust Requirements
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Q. Do sellers of memorials need to place in trust the funds collected for memorials
delivered to the purchaser?
A. In the case of a transaction involving only sale of a memorial and installation
service, if a buyer pays immediately or on an installment plan, the seller delivers
the memorial to the buyer immediately or within a contractually-stated reasonable
time after payment not tied to need or to completion of installment payments, the
transaction is not a preneed contract and trusting is not required. In the case
of a preneed contract including a memorial, the proper amounts must be placed in
trust within thirty (30) days after the end of the calendar month in which the contract
is paid in full. If the memorial is delivered to the buyer or “is placed in storage
with a responsible third party bonded and insured for the wholesale value thereof
and evidenced by a receipt specifically identifying the item, the specific preneed
contract, the location of the item, and the identity and address of the bonding
and insuring parties.” [ALA CODE §27-17A-44 (b)] before the time for trusting has
run, trusting related to the memorial is not required.
Q. Who can be a trustee of a merchandise and services trust?
A. The Act provides that any “person” can be the trustee of a funeral or cemetery
merchandise or services trust. An entity trustee does not need to be domiciled in
Alabama but its role as trustee must be consistent with its corporate or charter
powers and authority and permissible under applicable laws of its domiciliary state.
Because of the important interest protected by the Act, trusts with entity trustees
(i.e., banks, savings and loan associations, trust companies, or other financial
institutions) will be approved relatively quickly by the Commissioner of Insurance
(the “Commissioner’). Funeral or cemetery merchandise or services trusts with individual
trustees will be examined much more closely by the Commissioner. The submission
of funeral or cemetery merchandise or services trust agreements with individual
trustees will substantially delay approval of such trust agreements by the Commissioner.
Individual trustees must be bonded in an amount at least equal to the amount required
to be held in trust.
Q. Who can be a trustee of a cemetery endowment care fund?
A. The trustee of a cemetery endowment care fund must either be a bank, trust company,
savings and loan association, other financial institution, or a board of trustees,
at least three of whom reside within the State of Alabama and are bonded to honestly
perform the duties of trustee under a formal trust agreement. The amount of bond
on each trustee shall be a minimum of $25,000.00, but in no event shall the bond
on each trustee be less than the amount held in the endowment care fund.
Q. Must the trust be administered in Alabama?
A. No. The trust’s principal place of administration need not be in Alabama, but
the trust must be governed by Alabama law and deposits must initially be made into
an Alabama deposit or trust account controlled by the trustee before being transferred
to the principal place of administration.
Q. If a certificate holder chooses to participate in a trust created or sponsored
by an association of which it is a member, does that certificate holder need to
submit a separate trust document?
A. No. The trustee of the association trust will submit the association trust document
on behalf of all the association’s members. Approval will be given to the master
trust agreement. Certificate holders who choose to participate in such trusts must,
however, submit to the Commissioner an executed joinder agreement or a participation
agreement bearing the name of the sponsoring association.
Use of Life Insurance As A Funding Mechanism
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Q. If a preneed entity is using life insurance to fund the preneed contracts, is
a trust needed?
A. No trust is needed if life insurance sold in connection with the sale of preneed
contracts is used to fund the preneed contracts. This does not apply to preneed
contracts funded by life insurance purchased by a funeral merchandise and services
trust as allowed by Ala. Act No. 2008-271; such contracts are trust-funded contracts.
Q. Does a certificate holder have an insurable interest in the life of the preneed
purchaser?
A. No, a certificate holder does not have an insurable interest in the life of the
preneed purchaser and a certificate holder cannot purchase life insurance on the
life of a preneed purchaser.
Q. Does a trust have an insurable interest in the life of the preneed purchaser?
A. Under ALA CODE §27-14-3(d), as amended by Ala. Act No. 2008-271, a trustee of
a funeral merchandise and services trust is deemed to have a limited insurable interest
in the life of a preneed contract buyer or a preneed contract beneficiary that allows
for investment of trust funds in life insurance on the life of the contract buyer/beneficiary.
The trustee of a cemetery merchandise and services trust is not deemed to have an
insurable interest in the life of a preneed contract buyer or a preneed contract
beneficiary and thus the trustee of a cemetery merchandise and services trust may
not invest in a life insurance contract or annuity on that buyer/beneficiary’s life.
The extent of the trustee’s insurable interest is limited to the lesser of $20,000
or 100% of the purchase price of the preneed contract. The trustee may invest any
portion or all of the funds received under preneed contracts and deposited in trust
in life insurance contracts or annuity contracts issued on the life of the preneed
purchaser or preneed contract beneficiaries. Prior to the investment, the preneed
purchaser must consent, in writing, to the investment in a life insurance contract
or annuity on the life of the preneed purchaser. The Bulletin dated July 31, 2008
contains a model “written consent” form that must be used to obtain the informed
consent of the preneed purchaser prior to the investment. A substantially similar
form may be used by the trustee in place of the model, but such form must be approved
by the Department of Insurance. For further information on investments in life insurance
and annuities by preneed funeral merchandise and services trust, see the Bulletin
dated July 31, 2008 and ALA CODE §27-14-3 and ALA CODE §27-17A-32.
Q. Do the disclosure and consent requirements of the July 31, 2008 Bulletin apply
to both individual life insurance and group life insurance and is the model form
required for both?
A. Yes.
Q. If a person has an insurable interest in a preneed purchaser, does the preneed
purchaser need to give consent on the life insurance application?
A. Yes, unless there is an exception to the consent requirement. The only exceptions
to the consent requirement are where a power of attorney has been executed, there
is a legal guardianship or the person is a spouse of the preneed purchaser. A minor
child does not need to give consent if the parent of the minor child is purchasing
the life insurance on the minor child.
Q. Can a preneed entity hold the life insurance premiums?
A. No, checks for life insurance premiums must be made payable to the insurance
company, not the preneed entity. If payment is tendered to the preneed provider,
the preneed provider must furnish a receipt in compliance with Rule 482-1-078-.05.
Q. If a preneed entity uses individual life insurance to fund the preneed contracts,
does the preneed sales agent need to hold an insurance producer license to sell
life insurance?
A. Yes. Registration as a preneed sales agent does not itself allow the holder to
engage in the sale, solicitation, or negotiation of insurance. The preneed sales
agent must also be licensed as an insurance producer (agent) to sell ordinary life
insurance and properly appointed by the insurance company. However, the assignment
of an existing life insurance policy to fund a preneed contract does not require
a life insurance producer license.
Q. If a preneed entity uses group life insurance to fund the preneed contracts,
does the preneed sales agent need to hold an insurance producer license to sell
life insurance?
A. If the preneed sales agent or employee’s insurance related activity is strictly
limited to obtaining information needed to enroll a preneed contract beneficiary
in a group insurance plan or to issue that person a certificate of insurance under
a group insurance plan and the preneed sales agent or employee is not paid a commission
for such activity, an insurance producer license is not necessary. A person not
properly licensed as an insurance producer cannot engage in activity which is the
sale, solicitation, or negotiation of insurance.
Q. What is the minimum amount of life insurance to be issued on a preneed contract?
A. A life insurance policy sold in connection with the sale of a preneed contract
must, at a minimum, equal the retail amount of the preneed contract. Life insurance
purchased by a trust as allowed under Ala. Act No. 2008-271 may be in an amount
less than the retail amount of the preneed contract.
Q. May a preneed sales agent be paid a commission by an insurance company in addition
to any commission paid by a preneed provider for sale of a preneed contract?
A. Yes, if the preneed sales agent is properly licensed as an insurance producer
and properly appointed by the paying insurance company EXCEPT a preneed sales agent
may not be paid a commission incident to a trust’s purchase of life insurance under
Ala. Act No. 2008-271 even if properly licensed and appointed. A person not licensed
as a producer and properly appointed may not be paid insurance commissions.
Surety Bond Or Letter Of Credit As Alternatives To The Trust Requirements
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Q. If the preneed entity plans to fund the preneed contracts with a surety bond
or a letter of credit, can the trust fund language and life insurance language be
removed from the first page of the preneed sales contract and the terms “surety
bond” or “letter of credit” be substituted?
A. Yes. However, appropriate language addressing surety bond or letter of credit
must be substituted on the second page of the preneed contract for the language
regarding life insurance or trust.
Additional Cemetery Requirements
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Q. Are all cemeteries endowment care cemeteries under the Act?
A. No, cemeteries operated by governmental agencies or by religious institutions
and cemeteries which do not charge fees are not deemed endowment care cemeteries
and are exempt from the endowment care cemetery requirement to establish an endowment
care fund. If a cemetery stopped charging fees prior to May 1, 2002, the requirements
to establish and maintain an endowment care fund do not apply but that cemetery
must continue to maintain a list of the names and addresses of the owners and a
record of the property owners.
Installation Of Vaults Or Outer Burial Containers Before Need
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Q. Can vaults or other forms of outer burial containers be installed before need?
A. Yes, but certain conditions must be met as are outlined in the Bulletin dated
December 5, 2008. Among those conditions are: (1) The preneed contract must contain
a conspicuously-displayed provision, to be signed or initialed by the preneed purchaser,
in which the preneed purchaser elects to have the vault installed or not installed
prior to need. (2) The preneed contract must clearly distinguish between service
fees to install the vault/outer burial container before need and fees for re-opening
the previously installed vault/outer burial container, placing the casket, and closing
and covering the vault/outer burial container at need. (3) The disclosed fee to
install a vault/outer burial container before need shall not exceed 50% of the total
amount. (4) A disclosure form must be given to the preneed purchaser. See the Bulletin
dated December 5, 2008 for further information on the required conditions and a
model disclosure form.