Preneed FAQs
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| Insurance FAQ Main Page |
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| Click on a link below to see those type of
Frequently Asked Questions and Answers. |
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General Questions |
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Applications and Financial Reporting |
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Preneed Sales Agents |
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Trust Requirements |
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Use of Life Insurance As A Funding Mechanism |
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Surety Bond Or Letter Of Credit As Alternatives To The Trust Requirements |
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Additional Cemetery Requirements |
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Installation Of Vaults Or Outer Burial Containers Before Need |
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General Questions
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| 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? |
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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
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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.
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| 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?
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| 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.
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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. |
