Preneed Contract Funding and Cancellation
A funeral home sells a preneed funeral contract to a 78-year-old client for $8,500. The contract is funded by a life insurance policy with a face value of $8,500, naming the funeral home as beneficiary. The client pays a $500 deposit and signs a contract that includes a cancellation clause stating that if the client cancels within 30 days, the funeral home will refund all payments except a $300 administrative fee. The client cancels after 45 days. The funeral home has not yet provided any services. The state's preneed law requires that at least 70% of the contract price be placed in trust or used to purchase insurance, and that cancellation refunds be made within 30 days of cancellation. The funeral home has not deposited any funds into trust, claiming the insurance policy satisfies the funding requirement.
1. Does the insurance-funded contract satisfy the state's preneed funding requirement? Explain.
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Yes, if the insurance policy meets the statutory criteria. Most states allow preneed contracts to be funded by insurance, provided the policy is purchased with the intent to fund the contract and the funeral home is named beneficiary. The requirement that at least 70% of the contract price be placed in trust applies to trust-funded contracts; insurance-funded contracts are typically exempt from trust deposit because the insurance proceeds will cover the contract. However, the funeral home must ensure the policy is properly assigned and that the total benefits reasonably correspond to the contract price. Here, the policy face value equals the contract price, so it likely satisfies the funding requirement, assuming the policy is irrevocably assigned and the funeral home is the designated beneficiary. The funeral home's failure to deposit funds into trust is not a violation if the insurance exemption applies.
2. What refund is the client entitled to upon cancellation, and what are the funeral home's obligations regarding timing?
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The client is entitled to a refund of all payments made, minus any permissible administrative fee. The contract specifies a $300 administrative fee, but the state law may limit such fees. Under the contract, the client canceled after 45 days, so the 30-day cancellation clause with the $300 fee does not apply. The client is entitled to a full refund of the $500 deposit, unless the state allows a fee for cancellation after 30 days. The funeral home must make the refund within 30 days of cancellation. Since the client canceled after 45 days, the refund is due immediately upon cancellation, and the funeral home must refund the $500 (or $200 if the $300 fee is deemed applicable) within 30 days. Failure to do so may result in disciplinary action and penalties.