It’s more important than ever for funeral home and cemetery owners to carefully monitor preneed program assets.
As most funeral home and cemetery owners already are well aware, establishing a successful preneed program is an effective way to help ensure a regular stream of future revenues for their business. In fact, some industry consultants suggest a goal of up to 60 percent of your yearly business tied to preneed sales.
“Having a healthy percentage of preneed sales in the pipeline can give you a sense of comfort,” says David Falconer, Senior Vice President, Funeral and Cemetery Trust Manager at Regions Bank.
But just how much money that stream will actually deliver down the road depends heavily on the performance of the investments that underlie those preneed contracts — whether trust assets or insurance policies. Because the average duration of a preneed contract is only roughly seven years, it has always been important to carefully monitor the performance of these assets. Paying close attention is even more important now, because of the recently reduced expectations about how these investments may perform over time.
“We've all been fortunate for the last 10 to 15 years to have a situation where the stock market has been rising and bond markets were delivering adequate returns,” explains Falconer. “As a result, it was easy for all of us to assume that we were going to see the returns we needed year after year after year.”
These days, assuming could lead to problematic results. Even though the trend toward lower fixed income yields was already taking place in 2020, current projections for the performance of these investments suggest that their returns will continue to be lower going forward. Those projections are based on capital market expectations that investment analysts prepare each year to guide their investment recommendations.What’s Driving This Cautious Shift?
As COVID-19 began to spread in the United States, the federal funds rate — already low by historical standards — was slashed to zero in March 2020 to mitigate economic risks. Meanwhile, the Federal Reserve has indicated that it doesn’t have any immediate plans to raise the bellwether federal funds rate. Intraday rates may fluctuate, but even with signs of an economic recovery, the Fed has reiterated its commitment to maintaining a relatively low interest rate environment in order to bolster growth.
The upside of the Fed’s actions is that it keeps rates extremely low for borrowers. But the downside is that it also keeps the interest rate on government bonds near zero. And those safer, more conservative investments are the vehicles that are traditionally used to accumulate and grow the funds for preneed contracts for some trusts and most insurance policies.
Given that outlook, complacency, Falconer warns, could lead funeral home owners and directors to neglect taking steps to make sure that their preneed revenues cover future costs.
“The capital market assumptions that are being published right now for the next 10 years are telling us that fixed income investments — such as short-term bonds and U.S. Treasury notes — are going to return somewhere between zero to 2 percent,” says Falconer.
Bracing Preneed Assets For the Long Haul
With all of this in mind, what can funeral home owners do to minimize the effect of these expected persistent lower returns on their preneed assets? Ultimately, this may depend on whether you have established a funeral trust or fund your preneed programs with insurance policies.
If you have established a funeral trust to hold your clients’ preneed assets, consider talking with your trust’s investment advisor to see if an adjustment to the allocation of investments in the trust could potentially increase returns without introducing too much additional risk.
If the preneed funding is covered by separate insurance policies, a conversation with your insurance carrier may help you decide how to plan for an ongoing low rate environment. Because industry regulations limit the types of investment vehicles that insurance companies can use to invest, you may simply have to plan on receiving only the guaranteed death benefit on those policies and little to nothing for contract growth.
Whatever changes you decide to make, Falconer advises funeral home owners to keep a close eye on their preneed contracts going forward. “Based on the market conditions that we're in now and the growth rate that we may see in the next 10 years, you want to make sure you plan for the level of returns they will generate in the months and years ahead to avoid any surprises,” he says.
To learn more about how you can adjust your strategy for today’s environment, contact Regions Funeral and Cemetery Trust Services team.
