What are Preneed Contracts
Administrative Code 395-X-9-.01
- For purposes of this Chapter, a preneed contract is a written contract:
- entered into on a preneed basis (before death of the contract beneficiary);
- under which the purchaser pays or agrees to pay to the seller, before need and in whole or part, a purchase price for funeral merchandise and services or cemetery merchandise and services; and
- under which the seller’s responsibility to deliver the contracted-for merchandise or perform services, in whole or in part, is deferred until need.
- The following arrangements or transactions create a preneed contract:
- Transactions which combine a current sale with an agreement for delivery or performance at need and in which the purchaser assumes a current obligation to pay for future delivery or performance.
- Transactions in connection with selection of funeral or cemetery merchandise or services which result in a preneed provider being designated, on a preneed basis, as a beneficiary or assignee of a financial instrument intended to provide funds for payment of merchandise and service costs at need (i.e., a life insurance policy or annuity, or a deposit of funds like a bank account or certificate of deposit), whether revocable or irrevocable, unless, the preneed seller and the purchaser acknowledge in writing that there is no agreement concerning the purchase of funeral or cemetery merchandise and services entered into as a result of the purchase or assignment of the life insurance policy or annuity at the time of such a purchase or assignment.
- Any transaction or series of transactions which employ any artifice or scheme to evade, or have the effect of evading the requirements of, this Chapter and the Act.
- Any transaction in which the seller delivers the merchandise into some warehouse-type or other storage arrangement controlled by the seller until need.
- Any transaction deferring delivery or performance until need or until completion of installment payments.
- Any transaction involving vaults or other outer burial containers which, by their nature, require future service or replacement, placement of casket, sealing, closing, and covering.
- Any transaction involving any type of funeral or cemetery services that are not capable of being performed until need.
- Except as provided in the preceding section, the following arrangements or transactions do not result in a preneed contract subject to this Chapter even if entered into on a preneed basis:
- A retail sale of merchandise and immediate services – delivery or installation – directly relating to that merchandise where:
- the purchaser pays immediately or agrees to an installment payment plan.
- the seller delivers the merchandise to the purchaser immediately or within a contractually-defined reasonable time after payment not tied to need or to completion of installment payments. The purchaser must have legal title to and possession of the merchandise upon delivery into a storage arrangement controlled by the purchase or by virtue of installation on property under the purchaser’s control (such as cemetery space). Provided, that the seller may retain a security interest in the merchandise in a transaction involving an installment payment arrangement where merchandise will be delivered before completing of payments.
- no future service relating to the merchandise will be required to realize effective use of the merchandise.
- A prearrangement through which the purchaser specifies certain merchandise and services to be purchased at need, the seller agrees to sell that merchandise and those services at need with or without a preneed agreement on price (or an agreement about how a price will be determined at need), provided that the prearrangement contains no provisions for prefunding or prepayment.
- The sale of an interment right in a grave space, crypt, or mausoleum provided that the purchaser receives evidence of ownership of the right upon payment and the sale is not accompanied by the sale of any merchandise or service.
- Sale of a “return of mortal remains plan,” addressed in Rule 395-X-9-.02, in conjunction with a preneed contract.
- A retail sale of merchandise and immediate services – delivery or installation – directly relating to that merchandise where:
- A contract or agreement that is not a preneed contract shall not represent that portions of a purchaser’s payments are being placed on trust (except as necessary to comply with the requirements concerning cemetery endowment care funds) unless such deposits have been made in fact or otherwise represent or imply that the contract complies with the Act.
How are Preneed Contracts Secured
The statues, rules, and regulations that govern the sale of preneed contracts in the State of Alabama offer strict guidelines for which the sellers of preneed contracts must adhere to. The Alabama Board of Funeral Services oversees the regulation of said laws and rules and makes sure funeral establishments and cemeteries that offer preneed contracts are following those guidelines.
Part of those guidelines includes being properly licensed or registered to sell preneed contracts in the State of Alabama. The Board makes sure each applicant passes a background check and has properly applied to become a preneed seller in the state. During the application process, a funeral establishment or cemetery must provide the funding vehicle for which the entity will fund the preneed contracts. Entities selling preneed contracts have the option to fund the contracts 4 different ways; through insurance, trust, security bond, or letter of credit.
Insurance/Annuity
If a preneed entity offers insurance and/or annuity policies for its preneed contracts, they fund their contracts with insurance. The preneed purchaser’s funds are placed in an insurance or annuity policy and the funds are never managed by the seller. The insurance company manages both the preneed funds and the policy for the duration of the contract. When a preneed contract is ready to be fulfilled, the preneed seller submits a request to fulfill the contract to the insurance company, and the insurance company in turn sends the preneed funds to the funeral establishment or cemetery for fulfillment.
Trust
If a preneed entity offers to fund their contracts with a trust company, the preneed purchaser’s funds are placed in a trust fund. The preneed seller must submit a valid trust agreement to the Board for approval prior to using the trust company to fund preneed contracts. The preneed sellers are also required to submit payments to the trust no later than 30 days after the end of the calendar month in which the preneed funds were collected from the purchaser. The trust fund will manage the preneed funds until fulfillment. Just like an insurance or an annuity policy, the preneed seller must submit a request to the trust fund to fulfill a preneed contract, and the trust fund will submit the preneed funds to the funeral establishment or cemetery fulfilling the contract.
Surety Bond/Letter of Credit
When a preneed entity funds its preneed contracts through a surety bond or letter of credit, the purchaser is paying money directly to the preneed seller. A bank has agreed to back the preneed seller through a surety bond or a letter of credit and fund the preneed when it becomes fulfilled should the preneed seller find itself unable to monetarily fulfill the contract at the time of need. With this method, the preneed seller may choose to manage the preneed money as they see fit, rather than having the trust or insurance company manage the preneed money for the preneed seller.
Cancelling a Preneed Contract
34-13-233
- A purchaser, by providing written notice to the certificate holder, may cancel a preneed contract within 30 days of the date that the contract was executed provided that the funeral merchandise and funeral services have not yet been used. Upon providing the notice, the purchaser shall be entitled to a complete refund of the amount paid, except for the amount allocable to any funeral merchandise or funeral services that have been used and shall be released from all obligations under the contract. This subsection shall apply to all items that are purchased as part of a preneed contract.
- After 30 days from the date the preneed contract was executed, a purchaser, by providing written notice to the certificate holder, may cancel the funeral services, funeral merchandise, facilities, and cash advance items portions of a preneed contract at any time, and shall be entitled to the refund defined in the preneed contract allocable to those items. Any accumulated earnings allocable to the preneed contract shall be paid to the certificate holder upon the cancellation.
- Upon breach of contract or failure of the certificate holder to provide funeral merchandise or services under a preneed contract, the contract purchaser shall be entitled to a refund of 100 percent of all money paid on the contract. The refund shall be made within 30 days after receipt by the certificate holder of the contract purchaser's written request for refund.
- If a purchaser is 90 days past due in making payments on a preneed contract, the contract shall be considered to be in default, and the certificate holder shall be entitled to cancel the contract and withdraw all funds in trust. Upon making the withdrawal, the certificate holder shall refund to the purchaser the amount defined in the preneed contract in the event of default of the purchaser, provided that the certificate holder has provided the purchaser with 30 days' written notice of its intention to exercise any of its rights under this provision.
- All preneed contracts are cancelable and revocable as provided in this section during the lifetime of the purchaser, provided that a preneed contract does not restrict any contract purchaser who is a qualified applicant for, or a recipient of, supplemental security income, temporary cash assistance, or Medicaid from making his or her contract irrevocable.
- In the event that the preneed contract is made irrevocable pursuant to subsection (e), the authorizing agent shall have the right to appoint a provider other than the seller of the preneed contract. In the event that a provider is appointed pursuant to this subsection, the seller shall transfer to the appointed provider the amount paid by the purchaser to the seller and those amounts deposited into trust, less a reasonable transfer fee determined by the board. In the event the preneed contract was funded by an insurance or annuity policy, the seller shall cancel and relinquish any assignment of benefits or beneficiary status under the policy or annuity contract, and deliver the policy, if in the custody of the preneed seller, to the policy owner or his or her legal representative, and the seller may collect a reasonable transfer fee as determined by rule of the board. No transfer hereunder shall occur without the acceptance of the appointed provider.
- All refunds required to be made under this section to a purchaser who has canceled a contract must be made within 30 days after the date the written notice of cancellation is received by the certificate holder.
Frequently Asked Questions (FAQ)
The interest earned is the property of the preneed contract seller.
Yes, if the preneed contract is irrevocable and cannot be cancelled. Contact the Alabama Medicaid Agency at 1-800-362-1504 for further information.
Funeral homes or cemeteries are not obligated to accept a contract issued by another preneed seller or to perform services or provide merchandise at the prices listed in the other preneed seller’s preneed contract.
Insurance policy proceeds are not currently considered taxable income for U.S. Internal Revenue Service purposes.
Yes, but only if you are the owner of the insurance policy. However, the estate must make up the difference in policy value (the amount available at death will be the face amount less amount borrowed) at the time of death.
The insurance policy may be subject to surrender charges and perhaps a reduced cash value. The preneed contract will terminate when the insurance policy is cancelled. The cash value may be substantially less than the premiums paid.
Depending upon the nonforfeiture benefit elected, the insurance company may continue the policy by paying the premium out of the cash value of the policy. Once the cash value is exhausted, the life insurance policy will be canceled causing termination of the preneed contract. You should refer to your insurance contract for specifics.
Preneed purchasers have the right to terminate a contract any time prior to use, provided it has not been irrevocably assigned. A life insurance funded or trust funded contract may be cancelled within 30 days of the date purchaser signed the contract. If this is done, there will be a 100% refund of all monies paid. If a trust funded preneed contract is cancelled after 30 days, the preneed seller may impose a cancellation fee. If a life insurance funded preneed contract is cancelled after 30 days, the purchaser/ funeral beneficiary may retain ownership of the insurance policy. If the life insurance is cancelled, the owner of the policy is entitled to only the cash value of the policy which may be substantially less than the premiums paid.
Yes. There is a form that must be furnished to you to obtain your consent.
Yes
No
No. The trust is the owner and beneficiary of the contract.
No