There are four (4) types of preneed funding vehicles that comply with our law: insurance or annuity funding, trust funding, surety bond funding, or letter of credit funding. A Certificate of Authority may choose to fund by any combination of these types, so long as the Board is notified and has approved the funding vehicle for the Certificate of Authority prior to use.
34-13-171 (a)
Nothing in this chapter shall be construed to prohibit the funding of preneed contracts with multiple insurance or annuity contracts. Life insurance and annuity contracts used to fund preneed contracts shall conform with Title 27 as they relate to life insurance and annuities and shall cover not less than the initial retail price of the preneed contract.
INSURANCE/ANNUITY
34-13-171 (b)
The initial premium payment for a life insurance policy or annuity contract shall be made payable to the issuing insurance company, and the preneed seller shall remit the payment to the insurance company within 10 business days after the insurance application is signed by the parties. If a preneed contract provides for installment payments, each premium payment shall be made payable to the insurance company and, if collected by the preneed seller, shall be remitted to the insurance company within 10 business days after receipt by the preneed seller.
34-13-171 (c)
Nothing in this chapter shall prohibit a seller, or any other person, from receiving commissions earned and payable in regard to funding preneed contracts with life insurance or annuity contracts, provided the seller or other person holds a valid insurance producer license in this state and is appointed by the insurance company paying the commission.
34-13-171 (d)
A preneed seller may be identified as the beneficiary or assignee of the death benefit proceeds of a life insurance policy or annuity contract sold as a future funding mechanism for a preneed contract, but may not be the owner of the policy or annuity contract or exercise any ownership rights in the policy or annuity. If the preneed contract is cancelled before or after the death of the funeral beneficiary, the preneed seller shall cancel and relinquish any assignment of benefits or beneficiary status under the policy or annuity contract and deliver the policy or contract, if in the custody of the preneed seller, to the policy owner or his or her legal representative.
TRUST
34-13-194 (a)
Except as provided in Sections 34-13-171 and 34-13-195, every preneed contract shall require the monies paid to the seller or trustee to be placed in trust in accordance with Division 3, for funeral merchandise and services sold by funeral establishments or third-party sellers.
34-13-231
- Any person who is paid, collects, or receives funds under a preneed contract for funeral services or funeral merchandise to be funded by trust shall deposit in trust an amount at least equal to the sum of 75 percent of the amount collected on the purchase price for all funeral services and funeral merchandise sold, transportation, and facilities rented other than outer burial containers, 60 percent of the amount collected on the purchase price for outer burial containers, 110 percent of the wholesale cost of memorials from the amount collected on the purchase price of memorials, and 100 percent of the amount collected on the purchase price for all cash advance items sold.
- All deposits shall be made within 30 days after the end of the calendar month in which the preneed contract is paid in full, unless, prior to that time, all liabilities of the seller under the preneed contract to deliver the specific funeral merchandise or funeral services, or both, or the specific cash advances, identified by the preneed provider as properly allocated to the payment, have been satisfied, or the preneed contract is validly cancelled.
- The funds shall be held in trust, both as to principal and income earned thereon, and shall remain intact, except that the cost of the operation of the trust or trust account authorized by this section may be deducted from the income earned thereon.
- In no event may the funds be loaned to a certificate holder, an affiliate of a certificate holder, or any person directly or indirectly engaged in the burial, funeral home, or cemetery business. Furthermore, the certificate holder’s interest in the trust shall not be pledged as collateral for any loans, debts, or liabilities of the certificate holder and shall not be transferred to any person without the prior written approval from the board and the trustee. Even though the certificate holder shall be deemed and treated as the settlor and beneficiary of the trust for all purposes, all of the trust funds are exempt from all claims of creditors of the certificate holder except as to the claims of the contract purchaser, his or her representative, or the board.
- For all preneed contracts written or entered into on or after January 1, 2015, all required deposits in trust shall commence not later than 30 days after the end of the calendar month in which the sum of the monies collected on the preneed contract exceeds the amount that is not required to be deposited in trust as determined under subsection (a) unless, prior to that time, all liabilities of the preneed seller under the preneed contract have been satisfied, or the preneed contract is validly cancelled. Further required deposits on the contract shall thereafter be made not later than 30 days after the end of the calendar month in which each contract payment is collected by the seller.
34-13-232 (a)
If amounts paid by the purchaser under a preneed contract for funeral merchandise have previously been deposited in trust, the seller may withdraw the principal amount and trust appreciation attributable to the delivered item at such time as the funeral merchandise is delivered or installed or, if comprised of materials designed to withstand prolonged, protected storage without deterioration, the merchandise 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. For purposes of this subsection only, caskets and alternative containers may not be held in storage by the seller or a third-party storage facility prior to the death of the funeral beneficiary.
Because current trust agreements must be revised and filed for approval, this is the perfect time to evaluate your trust/trustee relationships and how well your current arrangement is meeting your needs. There are a number of trusts/trustees that specialize in the Preneed Industry. In fact, most if not all of these specialized trusts/trustees, have a significant relationship with the Board and either perform or contract with someone who performs, all of the Board’s record keeping requirements for you, such as providing a log with all required information at the contract level, providing statements of trust activities to coincide with Board deadlines, and files required documents on your behalf, such as preneed contracts and trust documents. These specialized trusts/trustees are indispensable. The services provided to you are paid for by the trust fees charged to your trust’s earnings/interest as any other trust/trustee relationship. For the most part, the fees charged to trusts by trustees specializing in Preneed trusts, are comparable to typical trusts that do not offer Preneed record-keeping at the contract level, and in some cases the fees may even be less, as these trusts tend to use a buy/hold, long-term strategy, rather than a day-trading approach, which may run up transaction fees, significantly reducing earnings or resulting in losses.
SAMPLE TRUST AGREEMENTS
We have revised our sample trust agreements to comply with changes in the law and regulations. These samples are for informational purposes only and do not replace the advice of an attorney. Use of the sample trust documents is not a substitute for the advice of an attorney. The Board cannot provide legal advice nor make any representation that the sample trust agreements are correct, complete or up to date. The Board is not responsible for any loss, injury, claim, liability, or damage related to your use of these sample trust agreements. The sample trust agreements can be found here.
SURETY BOND
Administrative Rule 395-X-11-.06
- A Surety Bond may be used in lieu of establishing and maintaining a merchandise and services trust. The Surety Bond, its form, and amount must be approved by the Board prior to use and written through an insurance company authorized to transact surety insurance in Alabama.
- The amount of the initial Surety Bond may not be less than the aggregate value of outstanding liabilities on undelivered preneed contracts of the Certificate Holder as of the end of its last fiscal year. For purposes of determining the amount of the Surety Bond, “outstanding liabilities” means the original retail amount of services and cash advances and the actual cost to the certificate holder to provide the undelivered merchandise sold on each contract written after April 30, 2002. The Surety Bond shall be in an amount sufficient to cover the outstanding liability at the time each contract is executed.
- After initial approval, the amount of the bond shall be increased or decreased as necessary to correlate with changes in the outstanding liabilities for the previous calendar quarter and the projected liability for the immediately following quarter.
The Board may also approve the use of a Surety Bond to cover a shortfall in the minimum equity required equity.
LETTER OF CREDIT
Administrative Rule 395-X-11-.07
- A Letter of Credit may be used in lieu of a Surety Bond, instead of establishing and maintaining a merchandise and services trust. The Letter of Credit, its form, and amount must be approved by the Board prior to use.
- The Letter of Credit must be “evergreen,” meaning it will not expire without an affirmative action by the issuer of the Letter of Credit. The amount of the initial Letter of Credit may not be less than the aggregate value of outstanding liabilities on undelivered preneed contracts of the Certificate Holder as of the end of its last fiscal year. For purposes of determining the amount of the Letter of Credit, “outstanding liabilities” means the original retail amount of services and cash advances and the actual cost to the Certificate Holder to provide the undelivered merchandise sold on each contract written after April 30, 2002. The Letter of Credit shall be in an amount sufficient to cover the outstanding liability at the time each contract is executed. After initial approval, the amount of the Letter of Credit shall be increased or decreased as necessary to correlate with changes in the outstanding liabilities for the previous calendar quarter and the projected liability for the immediately following quarter.
The Board may also approve the use of a Letter of Credit to cover a shortfall in the minimum required equity.