That Damn Guarantee: How to just say no to an unneccesary, money-losing promise

Preneed is a simple matter. You allow or encourage a person to preplan their funeral. This isn't rocket science. There are 2.3 million funerals a year performed with all levels of planning. Preneed is a simple matter. Where we screw it up is with the funding. We make this simple procedure and request complicated by:

• State laws
• Prepayment
• Investments
• Portability
• And That Damn Guarantee

What is the guarantee? The guarantee is the last words a funeral director says to a person while he or she is prepaying for a funeral. "I promise to accept the value of the trust account, or the death benefit of the insurance policy, as payment in full for the funeral you have arranged." And like a boy scout with 3 fingers raised in pledge form, the deal is consummated.

Now don't get me wrong, there are some funeral-home owners who don't guarantee. For those informed people, this column is a salute to your steadfast belief that the guarantee is not a promise you can make in good faith. You are offering with your funding what the insurance industry calls a "final expense policy." How many nights of insomnia did I watch Roger Staubach pitch the importance of buying a life-insurance policy to pay for your funeral. He didn't deal with the service component, only the funding. You pre-arrangers are establishing the service component. Why do we have to try to fulfill both sides of the argument? For the approximately one-third of the industry that does not guarantee, you are not alone. And by not making this promise, you are more profitable. For all the rest of you, read on.

I am certain that somewhere around age 8, your parents told you, "Never make a promise you cannot keep." This is typically the lesson after you screwed something up that only a child can do and with tears running down your chubby cheeks you said, "I promise not to do that again." Well, to all the funeral-home owners who were once 8 years old, remember that lesson. You cannot make this promise to accept the value of the fund to fulfill the funeral cost - at least not without subsidizing the difference. That is because there is a gap in the trust value and the funeral value.

Funerals have typically grown at a rate of 5% during the past 20 years. Death benefits from preneed life insurance have grown approximately 3.5% per annum for the same time period. Trust funds have done slightly better in low-risk environments, but have not equaled the inflationary price of funerals. Some savvy funeral directors (FDs) and ex-association directors have invested their preneed funds in equity positions and enjoyed meteoric rises in value. But anyone who knows anything about meteors knows they don't rise for long, and those same people have suffered principal declines in the value of their investments. The stock market is not the place for preneed-fund investing for the typical funeral director.

I have studied funeral service inflation (FSI) for the past 25 years. It is a simple calculation for a geek. The results of the calculation are this: FSI has consistently been higher than CPI. FSI has been about 100% higher than CPI year in and year out. FSI is the explanation for the decrease in profits of the typical funeral home from about 14% of revenue in 1985 to about 5% of revenue today. This decline is in light of the increase in consumer spending.

The little economist inside of me can sum it up in only 11, 884 words. (Go to www.thefuneralcoach.com for the complete explanation and more good stuff.) I will shorten it even more for you. Your costs are going up at a rate higher than you are increasing your prices, and no trust or insurance policy can consistently keep up with the cost increases that you are experiencing. You are not immune from this basic law.

So that damn guarantee is a problem. It gets worse. If there is this basic math thing going on, then you are having shortfalls on preneed accounts when they go at-need. Because of that damn guarantee, you cannot ask the family for additional payment to cover the shortfall. You smile your comforting smile, knowing that this is a discounted bill. Occasionally, due to time, compounding, master-trust bookkeeping or some other factor, you may have an account that has excess money. What do many FDs do with the excess? They give it to the family! Now that is silly isn't it?

If you are in a state that mandates the excess be returned, then lobby your state legislature. The excess from some (which should not be happening at all) should go to cover the shortfalls you are having on the many. Imagine a dumb bookie: If you win your bet, he pays off, but if you lose your bet, he gives you your money back. That is what FDs are doing by returning the excess. Yes, it provides good consumer harmony, but so would giving away a new Cadillac to all that attend a funeral. Unless you're Oprah, don't try that!

So, how do you break the addiction to that damn guarantee. One day at a time, one step at a time. Join "GA" - Guarantee Anonymous! Join a meeting. Call your GA sponsor whenever you feel the need. Get through each day, one at a time, without offering that damn guarantee. And then, become a missionary for GA. Preach to your fellow FDs. Stand in front of state conventions witnessing to your brothers and sisters in the drab suits and black shoes. Ride your bike wearing a white, short-sleeve shirt & black tie. Ring doorbells at funeral homes offering to share the gospel of those who once guaranteed but now see the light.

I suspect that preneed today represents about $18 billion dollars of trust deposits and life-insurance death benefits. I suspect that preneed deposits in life insurance and trust accounts grow by about $2 billion dollars a year. Someone is getting wealthy on preneed, but it is not the funeral home owners as long as they keep giving that damn guarantee!

Dan Isard is President of the Foresight Companies, Phoenix, which has helped more than 1,000 funeral homes and cemeteries improve their operations, increase profitability and grow their business. Dan is the deathcare industry's top buy/sell expert and has handled more than 650 sales and transfers of family-owned firms. He is the author of the bestselling guidebooks, "The Dealmaker's Guide to Funeral Home Transactions" and "How to Stay Independent and Very Profitable." He also published the Preneed Perspectives monthly newsmagazine. He can be reached at 800-426-0165 or DanIsard@f4sight.com