1 Overview of Issues for Interim Charge Related to Insurance Funded Prepaid Funeral Contracts Texas Department of Banking April 2008

2 Prepaid Funeral Contracts Purpose of Chapter 154 of the Texas Finance Code (TFC): –Provide a regulatory framework to give the public an opportunity to arrange and pay for funerals in advance of need. –Provide all safeguards necessary to protect and assure that the prepaid funds are available at a future date to pay for prearranged funeral services. Two regulatory objectives to achieve purposes of Chapter 154: –Make sure a prepaid contract is performed in accordance with its terms, meaning the funeral goods and services selected by a purchaser are provided as specified in the contract. –Make sure funds are available at a future date to pay for the contracted goods and services at the time of need.

3 Prepaid Contract Industry Statistics (As of 12/31/2006) Number of Permits Number of Contracts Dollars Trust Funded ,349$910,043,426* Insurance Funded 56456,251$1,970,922,913* TOTALS ,600 $2,880,966,339 Insurance is total value of insurance policy/PFC contract while trust is amount paid in to date on contract.

4 Options to Fund Prepaid Contracts PrePaid Funeral Customer wishes to prearrange and prepay for specific funeral goods and services Two options to fund the prepaid funeral contract: (1) trust-funded; or (2) Insurance funded Trust Seller / Funeral Provider Insurance Seller Subsidiary of Insurance Company Financial Institution (funds deposited) Insurance Company (issues insurance policy) Funeral Provider

5 Typical Sale of a Trust-Funded Prepaid Funeral Contract (1) Ms. Smith visits a funeral home and selects the items for her funeral. Ms. Smith signs a contract and pays the funeral home. (2) A funeral home representative signs the contract and deposits 90% of Ms. Smith’s money into a restricted bank / trust account for her funeral when she passes away. The funeral home can keep up to 10% of the contract price for its overhead costs. The funeral home is also the Department’s permit holder.

6 Typical Sale of an Insurance-Funded Prepaid Funeral Contract (3) The agent sends Ms. Smith’s money, insurance application, and the contract to the permit holder to approve and sign the contract. The permit holder is not the funeral home and does not have an agreement with the funeral provider to ensure Ms. Smith’s contract is honored at the time of need. (1) An insurance agent (who may or may not be an employee of the funeral home) contacts Ms. Smith to discuss her funeral arrangements. Ms. Smith selects her funeral items, signs the contract, and pays the agent. (2) If the agent is not an employee of the funeral home, the agent is required to get the funeral home to also sign the contract as the provider only. (4) The Permit Holder sends Ms. Smith’s money and application to the insurance company to issue the policy to fund the contract. The insurance company will typically pay the agent a sales commission up to 30% of the face amount of the policy.

7 Concerns with Insurance Funded Prepaid Funeral Contracts Insurance-Funded Permit Holders: –claim they have no responsibility or ability to maintain records or verify that a prepaid funeral contract (PFC) is properly honored at the time of need. No contractual agreements are made between the funeral provider and the permit holder. Example - At the time of need, a funeral provider who sold the prepaid contract as the insurance funded permit holder’s agent overcharges a family $500 for a casket specified and purchased on the prepaid contract. The insurance funded permit holder states it is not responsible for the actions of funeral providers and is not responsible to refund any overcharges.

8 Concerns with Insurance Funded Prepaid Funeral Contracts Insurance-Funded Permit Holders: −have abandoned their permits, leaving no entity to maintain the records or take responsibility to verify that the prepaid funeral contracts are properly honored at the time of need. Examples - Magna Financial Services, Inc. abandoned insurance funded permit in 2001 with 1,169 outstanding contracts representing a total death benefit of $4,087,660. IEIS Fidelity Plan, Inc. abandoned permit in 2004 with 1,957 outstanding contracts representing a total death benefit of $6,948,575.

9 Concerns with Insurance Funded Prepaid Funeral Contracts The prepaid funeral contract is not “linked” to the policy. The policy is not required to pay any growth and can leave the funeral provider with less than sufficient funds to pay for the funeral at the time of need. There are no consumer disclosures that tell the purchaser: –He may be buying more insurance than is necessary to fund a prepaid funeral contract. –Depending on his age, health and type of policy issued, he may pay substantially more than actual prepaid contract total. –Cancellation cash surrender values are substantially less than amounts paid in. –He may lose his policy benefits when he assigns the policy back to the permit holder.

10 Total Death Benefits of Insurance Funded Prepaid Funeral Contracts

11 Number of Outstanding Insurance Funded Prepaid Funeral Contracts