Pre-Need Funding Models: Trust vs Insurance - State-by-State Requirements
Your state mandates ONE of three pre-need funding models. Choose the wrong one and face regulatory violation fines. Understand your state's requirements and the financial/operational implications of each model.
Key Takeaways
• Trust model: Funds held in bank account; funeral home controls investment; higher returns but more complexity• Insurance model: Burial insurance policy; insurance company manages funds; simpler but lower returns• Hybrid model (rare): Some states permit both simultaneously for different contracts• State mandate varies dramatically: Know YOUR state's exact requirement IN WRITING• Regulatory violation costs: $5,000-50,000+ fines plus potential license suspension
Why This Decision Matters Financially
Choosing between trust and insurance models directly impacts your pre-need profitability. A funeral home managing $500,000 in pre-need contracts generates drastically different returns based on the funding model chosen.
Trust Model Example: $500,000 in pre-need trusts earning 3.5% annually = $17,500/year in interest. Over 10 years = $175,000 additional revenue. That's pure margin if your software/operations are efficient.
Insurance Model Example: $500,000 in burial insurance policies earning 0.5-1% in cash value growth = $2,500-5,000/year. Over 10 years = $25,000-50,000. Plus, you pay 5-15% commission to insurance agent (one-time: $25,000-75,000).
Financial Impact: Trust model generates $125,000-150,000 MORE over 10 years than insurance model. If your state permits BOTH, trust is significantly more profitable. If your state mandates insurance only, you accept the lower returns.
Understanding the Three Pre-Need Funding Models
Model 1: Trust Fund Account (Funeral Home Controls)
Family pays for service upfront. Funeral home deposits money in dedicated trust account (separate from operating funds). Funds sit in trust earning interest. When service occurs, funds are released to cover cost.
Pros:
- • Funeral home earns interest (3-4% typical in today's rate environment)
- • Full control over investment strategy
- • Direct relationship with family (no intermediary insurance company)
- • Higher profit margin on pre-need contracts
- • Potential to grow pre-need revenue through successful investment performance
Cons:
- • Significant regulatory complexity and auditing requirements
- • Funeral home responsible for trust account management and accuracy
- • Annual accounting and tax reporting requirements ($2,000-5,000/year)
- • Regulatory violations carry stiff penalties ($5,000-50,000+)
- • Family has legal claim to exact funds (if service prices increase, shortfall is funeral home's liability)
States that Mandate Trust Model: California, Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont, Washington, Wisconsin (approximately 27 states).
Model 2: Burial Insurance (Insurance Company Controls)
Family purchases burial insurance policy. Insurance company collects premiums and holds funds. When death occurs, policy pays out directly to funeral home.
Pros:
- • Minimal regulatory burden on funeral home
- • Insurance company handles investments and compliance
- • No annual trust account audits or accounting
- • Simpler operations
- • Family benefits from underwriting protection
Cons:
- • Funeral home earns 5-15% commission on sale (one-time)
- • No ongoing interest income for funeral home
- • Insurance company controls investment strategy
- • Lower cash value growth (0.5-1% typical)
- • Relationship is with insurance company, not directly family
- • Commission structure creates incentive to oversell insurance (regulatory red flag)
States that Allow/Mandate Insurance Model: Alabama, Alaska, Arizona, Arkansas, Connecticut, Delaware, Hawaii, Idaho, Kentucky, Maine, Maryland, Mississippi, Montana, Nebraska, Nevada, North Dakota, Pennsylvania, South Carolina, South Dakota, Utah, Virginia, West Virginia, Wyoming (approximately 22 states allow insurance).
Model 3: Hybrid (Both Trust and Insurance)
Rare but permitted in some states. Funeral home offers both funding options to families. New contracts use trust model; existing contracts may be insurance-based. Creates accounting complexity but maximizes revenue.
States Permitting Hybrid: Limited. Typically those with "both are acceptable" language: Texas, New York, California (specific rules apply).
State-by-State Breakdown: Determine Your State's Requirement
Step 1: Identify Your State's Category
Contact your state funeral board and ask: "Are pre-need funds required to be held in a trust account, burial insurance policy, or can funeral homes choose either model?"
Request written confirmation and save the response. This is your compliance documentation.
Trust-Mandate States (Most Common)
Your state requires ALL pre-need funds to be held in trust accounts. Insurance-backed pre-need is NOT allowed. Violating this carries significant penalties.
Action Required: Implement trust account management, establish annual audits, hire accountant for tax reporting, train staff on trust account procedures, maintain detailed trust records.
Insurance-Mandate States
Your state requires ALL pre-need to use burial insurance. Trust accounts are NOT allowed. Most common in southern and western states.
Action Required: Partner with insurance carrier, train sales staff on insurance policies, establish commission structure, maintain insurance policy records, disclose commission to families (FTC requirement).
Choice States (Rare Advantage)
Your state allows BOTH trust and insurance models. Funeral home chooses based on business model. Huge competitive advantage—choose trust for higher profits.
Action Required: Choose trust model (financially superior). Implement trust account management. Offer families trust vs insurance choice (though trust is strongly recommended internally).
Financial Comparison: The Numbers That Matter
Scenario: $300,000 in Pre-Need Contracts (Average Small Funeral Home)
Trust Model (State Mandates or Allows):
- • Initial setup: $2,000-3,000 (attorney, accounting setup)
- • Annual operations: $3,000-5,000 (annual audit, tax reporting, staff time)
- • Interest earnings: $300,000 × 3.5% = $10,500/year
- • Net annual profit (after compliance costs): $10,500 - $4,000 = $6,500/year
- • 10-year total return: $65,000 (plus interest on interest)
Insurance Model (State Mandates or Allows):
- • Initial setup: $500 (insurance agent commission structure)
- • Commission on $300,000 pre-need: $300,000 × 10% = $30,000 (one-time)
- • Annual operations: $1,000 (policy tracking, minimal admin)
- • Insurance cash value growth: $300,000 × 0.75% = $2,250/year
- • Net annual profit (after costs): $2,250 - $1,000 = $1,250/year
- • 10-year total return: $12,500 + $30,000 commission = $42,500
Difference: Trust model generates $22,500 MORE over 10 years (53% higher return). If you're in a choice state, trust model is financially superior.
Implementation Roadmap: Choosing Your Model
Week 1: Determine Your State's Requirement
Contact state funeral board. Ask about trust vs insurance requirements. Get written confirmation. File the response in your compliance folder.
Week 2-3: If Trust Model Required/Chosen
Hire accountant specializing in funeral homes. Have attorney set up trust account structure. Establish quarterly audit schedule. Train staff on trust account procedures.
Week 2-3: If Insurance Model Required/Chosen
Contact 3-4 burial insurance carriers. Negotiate commission rates (typically 5-15%). Set up policy management system. Train sales staff on insurance products.
Week 4+: Launch & Monitor
Begin accepting pre-need contracts under chosen model. Track compliance metrics. Monitor profitability. Adjust strategy based on family feedback and financial performance.
Common Compliance Mistakes
Mistake 1: Mixing Models Without State Permission
Offering both trust and insurance in a trust-mandate state. Regulatory violation. Penalty: $5,000-25,000 fine + license warning.
Mistake 2: Insufficient Trust Account Documentation
Not maintaining detailed records of trust deposits, interest, and withdrawals. Audits will catch this. State requires perfect accounting.
Mistake 3: Committing Insurance Without Disclosure
Receiving insurance commission without clearly disclosing it to families. FTC violation. Families must know funeral home profits from insurance sale.
Mistake 4: Skipping Annual Audits (Trust Model)
Assuming you don't need annual audits if you're "small." Most states require annual reconciliation regardless of size. Missing this = regulatory violation.
Your Next Step: Ask the Critical Question
Email your state funeral board today with this exact question:
"Our funeral home is structuring our pre-need program. Are we required to hold pre-need funds in a trust account, burial insurance policy, or may we choose either model? Please provide written confirmation of your state's requirement."
Save their response. This is your compliance proof. Then implement the required or chosen model following the roadmap above.
Related reading: Learn more about trust fund management and regulations, or understand how to monitor trust fund performance.