As a licensed seller of pre-need services, funeral homes can offer families a variety of options for payment methods. Two common options are pre-need trusts, often set up through an association, and pre-need insurance policies. While both approaches serve the same purpose—helping customers prepare for future funeral costs—they work in different ways.

Pre-need trusts through an association

Most funeral homes have access to master pre-need trusts, which relieves individual funeral homes of compliance and administrative responsibilities while giving them access to investment pooling and other benefits. Typically, these master trusts are available through state associations, such as state chapters of the National Funeral Directors Association. The association works with service providers to administer the trust and its investments.

For example, the Iowa Funeral Directors Association facilitates the Iowa Prepaid Funeral Trust and makes it available to its members. UMB Bank serves as the trustee bank responsible for holding and managing the trust’s assets.

Pre-need trusts are often flexible, permitting lump-sum contributions or installment payments. Since funds are invested, they may earn interest, potentially helping offset inflation and rising costs. The money remains in trust until it is needed, ensuring it is available to cover funeral arrangements.

Some funeral-home customers may see a financial benefit of participating in the trust. The Iowa Prepaid Funeral Trust, for example, enables customers to set aside up to $13,125 without a detailed goods and services statement (and more with a detailed statement). These funds are typically noncountable for Medicaid purposes.

Funeral homes may benefit financially as well. If allowed under state law and trust rules, funeral homes may be permitted to retain any excess funds beyond those needed to fulfill contracted services. Trust-funded accounts may also increase the value of the funeral home itself, due to predictable future revenue.

Pre-need insurance

Pre-need insurance, on the other hand, is a life insurance policy designed specifically for funeral costs. Funeral directors act as insurance agents, and an insurance company issues the policies directly to their customers. Customers pay premiums—monthly or annually—and the insurance company guarantees payment to the funeral provider upon death. Unlike a pre-need trust, pre-need insurance may include underwriting, which may involve health questions or age-based restrictions. However, pre-need insurance can be appealing for those who prefer smaller ongoing payments rather than a lump sum.

Note that while funeral homes earn commissions on sales of pre-need policies, these earnings may be more limited than those associated with trusts, for two main reasons: (1) a narrower group of interested customers, and (2) the potential for long-term contracts to generate substantial investment income beyond what’s needed for services.

Key differences from the customer’s perspective

  • Flexibility: Trusts often allow more payment and investment options, while insurance typically follows a set premium schedule.
  • Growth potential: Trusts may earn interest, while insurance usually pays out a fixed benefit.
  • Eligibility: Insurance may have age or health restrictions; trusts generally do not. Some families don’t qualify for or don’t want to buy insurance. A trust is often simpler and more flexible.
  • Control: Trust funds are tied to the funeral provider or association, while insurance benefits are contractually guaranteed by the insurer.

Which is right for your customers?

Choosing between a pre-need trust and pre-need insurance depends on many factors. A trust may be better for those who want straightforward savings with potential investment growth, while insurance may suit those who prefer spreading the costs over time with guaranteed coverage.

UMB is a nationally recognized and ranked provider of bond trustee and agency services to the corporate and municipal marketplaces. UMB is a leading provider of funeral trust services to funeral homes, cemeteries and related associations throughout the country, having provided such services for more than 75 years. Visit our website to learn more about UMB and whether we are the right funeral trustee for your organization.