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These guidelines are advisory in nature and set out general concepts rather than precise statutory language. The ICCFA is not recommending that the guidelines be codified into law as a whole. Instead, the guidelines are intended for consideration as a series of options to be selectively chosen by interested parties to address particular concerns.
Developed in 1998 by the Government and Legal Affairs Task Force of the
International Cemetery and Funeral Association
The use of life insurance and annuity policies, as an alternative to other funding vehicles for prearrangements, has developed into a specialty market whereby these policies contain features which permit the death benefit of the life insurance policy to increase during the lifetime of the insured. These increases, whether indexed or discretionary, are designed to keep pace with the rising cost of providing pre-selected cemetery and funeral merchandise and services at some unknown time in the future.
These specialty policies contain all the standard features of life insurance and annuity products, but in addition, contain elements which are generally not readily available through the life insurance market. These are:
Under a typical insurance-funded prearrangement, the consumer first prearranges for cemetery or funeral merchandise and services. It is this transaction which leads to the purchase of life insurance to fund the prearrangement. Generally, the initial face amount of the life insurance policy is based upon the current retail cost of the prearrangement. In many prearrangements, providers are willing to guarantee the price of some, or all, of the merchandise and services selected because of the feature in the life insurance policies whereby the death benefit increases over time.
To secure these guarantees, if any, and to facilitate payment of the prearrangement at time of death, the policy owner normally executes a contingent revocable assignment of the death benefit of the life insurance policy to the selected provider. It is important to note that the assignment is contingent upon actual fulfillment of the prearrangement by the provider. If no merchandise and services are provided, the precondition of the assignment does not occur, and death benefits are paid to the named beneficiary of the life insurance policy (normally a family member). During the lifetime of the insured, the policy remains transferable and the insured retains the right to change both the prearrangements and the freedom to choose a different provider.
Unlike prearrangements which are funded through prepaid contract trust funds, payment of premiums is NOT made to the provider. Instead, the consumer makes all payments directly to the life insurance company. Since no monies are exchanged for cemetery or funeral merchandise and services until after the consumer dies, there can be no "sale" of merchandise or services on a preneed basis subject to the state preneed laws.
The use of life insurance to pre-fund a prearrangement benefits the consumer in several ways. Single premium products always provide a death benefit greater in amount than the premium paid, thus for the same amount as would be placed into other funding, a greater initial amount of benefit is purchased. For those who cannot afford to pay a single premium, multiple payment plans provide two distinct advantages: a.) For those who can pass limited underwriting, full first day coverage is available. Since full benefits are available upon death (even when the total premium has not been paid), the provider is able to guarantee the prearrangement immediately. b.) For those who cannot pass the health questions, limited benefits are available during the first two years, but beginning the third year of coverage, full death benefits are available. Thus, the provider may guarantee the prearrangement at that time. In both scenarios, guaranteed prearrangements are available, whereas most other types of funding cannot provide guarantees until all payments are made. When payment schedules may extend over five to ten years, this is a considerable benefit to many consumers.
Finally, the nature of the life insurance market includes the payment of commissions. These commissions provide a source of income to sellers which permit them to pay current preneed expenses without tapping into other resources.
The National Association of Insurance Commissioners ("NAIC") has addressed the use of life insurance products in the funding of prearrangements, and adopted a model law which is designed to provide consumers with specified information when life insurance is selected as the funding source. In developing this model, the NAIC considered factors relevant to elderly consumers, in addition to standard disclosures to individuals purchasing life insurance products in this market.