In my previous article, “Potholes and Pitfalls: Hazards of Accepting Life Insurance Assignments”, I discussed problems faced by funeral home owners in processing and collecting life insurance assignments, detailing many of the areas of concern that could lead to financial loss for the funeral home.
There are two types of companies offering advance funding on life insurance assignments today in the United States: “lenders” and “factors”. Unfortunately, most funeral home owners do not realize the difference between the two, until their life insurance funding company asks them to repay a loss on an assignment.
According to Wikipedia, a “lender” is a person or company that gives money to another person or company with the expectation that it will be repaid. A “factor” is a financial transaction in which an account receivable (i.e. the life insurance assignment) is sold to a third party (called a “factor”) at a discount. “A business will sometimes factor its receivable assets to meet its present and immediate cash needs.”
A significant minority of funeral home owners in the United States today fund their life insurance assignments through various companies. Families of deceased loved ones are not always prepared for the stressful financial requirements attendant to the passing of a loved one. Even if the funeral home accepts life insurance assignments for the goods and services purchased from the funeral home, many families are not prepared for the “out-of-pocket” expenses to third parties for the obituary notice, florist, cemetery and other vendors not directly attributable as “funeral home charges”. Most funeral home owners want the families they serve to pay these third-party “cash advance” costs upfront, and do not want to advance those funds and wait for the life insurance company to reimburse the funeral home at a later date. Many families also have financial obligations of their own which they would like to satisfy now through their loved one’s life insurance, rather than going through the process of filing a life insurance claim and waiting weeks or even months for the life insurance company to mail them a check.
Due to the rising cost of goods and services, it is understandable that funeral home owners must receive full payment on the obligations incurred by families prior to the funeral and interment. Most funeral homes publish payment policies that they present to families prior to or at the funeral arrangement, as required by the Federal Trade Commission’s Funeral Rule. Most funeral homes ask families to satisfy their obligations under the funeral contract by check, debit card, credit card, or some other immediate form of payment prior to the funeral. Many families ask the funeral home to accept payment through an assignment of life insurance proceeds. Due to the policies and procedures of life insurance companies in filing and processing death claims, the life insurance claim cannot be completed and payment received at the funeral home prior to the funeral and interment. It may take several weeks to several months or longer for the life insurance company to pay the assignment. That is why many families turn to the opportunity available through the funeral home through a financially strong and reputable life insurance funding company to obtain immediate cash for the portion of the life insurance policy proceeds necessary to settle the funeral and cemetery charges, and the “cash advance” charges by third-party vendors.
The life insurance funding company provides the family a low-cost funding service to obtain a cash advance on the decedent’s life insurance benefits. That service is like the income tax “rapid refund” that so many tax payers are used to accessing at tax time. The beneficiary of the life insurance can request the immediate funding of the verified life insurance proceeds, usually up to the full amount of the verified life insurance benefit, to satisfy the funeral and cemetery charges, all third-party vendor charges for the funeral, and even a cash advance for any other personal financial needs. Funds are normally available and can be deposited into the funeral home or cemetery bank account within 24 hours of final verification of the availability of the life insurance proceeds and confirmation of the identity of the designated beneficiary. A “reasonable fee” is deducted from the life insurance funds for the work of the funding company in verification and advancing the funds, and filing and following-up on the life insurance claim. Other than preparing and having the beneficiary sign the necessary assignment documents and insurance company claim forms, neither the funeral home nor the beneficiary ever have to work with the life insurance company to process the claim. Advance funding to the funeral home and cemetery by the funding company allows the family members to focus on the family and its friends, rather than be side-lined by the financial demands of the funeral, relieving the financial stress of dealing with the funeral as the grieving process begins. This gives the family comfort in the certainty that a proper, timely and dignified funeral and interment is provided for their loved one without the burden of worrying about managing the financial arrangements in their time of loss.
The funeral home charges the beneficiary the “funding fee” for the company advancing the funds, where allowed by state law. The Federal Trade Commission’s “Funeral Rule” disclosure requirements apply to this funding fee, as with all other required charges to families. However, there are certain risks for funeral home owners in dealing with some life insurance assignment funding businesses.
Most of the life insurance funding companies operating in the United States today are “lenders””, not “factors”. In the body of their assignments and /or re-assignments, there is specific language that requires the funeral home accepting assignments from life insurance beneficiaries to reimburse the funding company for any and all losses incurred by the funding company at any time after advancing the funds to the funeral home. Funding to the funeral home or cemetery is with full recourse. Thus, the funding company has little or no risk of loss. The entire risk of loss is transferred to the funeral home. Those funding companies are lenders. Most also require the funeral home to which funds have been advanced to reimburse them in full, if the assigned funds are not paid to those funding companies within a certain number of days of the funding, usually about 90 days. Those funding companies charge lower funding fees, usually in the 3.5% range.
A very few of the funding companies are “factors”, rather than lenders. A “factor” is a business that funds your “account receivable”, or life insurance assignment in our situation, for a specified fee, and irrevocably transfers the risk of loss on that transaction from you and your funeral home or cemetery to the funding company. Their assignments do not require their funeral home customers to reimburse assigned funds at any time in the future. These funding companies charge higher “factoring fees”, usually in the 5.0% range or higher. Those fees are charged to the beneficiaries of the life insurance and disclosed on the funeral contracts. These funeral homes have no risk of loss, so after the funds are deposited into their bank accounts, those funds are irrevocably owned by the funeral homes and cemeteries.
If your funeral home is charging the funding fee to the families you serve, why would you charge the families a lower funding fee and assume all risk of loss on the life insurance claims, versus charging the higher fee to the family and avoiding the losses? The common sense of the question begs the answer!
Just as I advised funeral home owners in my previous article to avoid the “Potholes and Pitfalls” caused by insurance company errors in verifying, processing and paying life insurance assignments, it is my considered opinion that funeral home owners should deal only with “factors” rather than lenders in their life insurance assignment funding to avoid the extremely unpleasant experience of having to reimburse assigned funds to lenders due to their errors, or insurance company errors, in verifying and processing life insurance claims. FBA
Danny Smith is Director of Business Development for North Carolina Mutual Financial, LLC, a nationwide life insurance factoring company and a wholly owned subsidiary of North Carolina Mutual Life Insurance Company. He is recognized by his peers as a leader in the life insurance factoring industry, and has been involved in over 100,000 life insurance claims during the span of his nearly 21-year career. Danny can be reached by phone at (757) 714-7156 or by email at [email protected]