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4000 - Advisory Opinions


Eligibility of Pre-Need Funeral Services and Merchandise Funds for "Pass-Through" Insurance

FDIC-90-66

November 21, 1990

J. William Via, Jr., Counsel

This is in response to your inquiry about the eligibility for "pass-through" deposit insurance of payments made in advance under contracts for funeral services or funeral merchandise.

A company that agrees to provide such services or merchandise may be required by state law (Iowa Code, Chapter 523A) to deposit a minimum of eighty percent of all payments received under the agreement in a federally insured depository institution in the name of the depositor (company) in trust for the designated beneficiary; this arrangement is not irrevocable inasmuch as the funds may be released by the company to the payor by mutual consent at any time prior to the death of the beneficiary. In lieu of complying with the deposit requirement, a company is permitted to file with a designated state official a surety bond issued by a qualified surety company that is conditioned on the faithful performance by the seller of its agreements to provide such services or merchandise.

The funds that comprise the deposits in these circumstances appear to be nothing more than payments made in consideration for the performance of contractual obligations and to be funds in which a payor has no ownership interest and with respect to which the payor bears no risk of loss. Put another way, once a contract is entered into and the payor performs by making the requisite payments, the company is obliged to perform its part of the bargain irrespective of what disposition is made of the funds (excluding, of course, a refund to the payor upon recission of the contract by mutual consent). Thus, it appears that the company owns the funds and that deposits comprised of such funds are not eligible for "pass-through" deposit insurance.

You may be interested to know that the FDIC staff has opined that, in contractual arrangements of this type, the payor retains the requisite ownership interest for "pass-through" insurance only if the payor is unilaterally entitled to the return of the money paid at any time before the company furnishes the services or merchandise contemplated by the contract. For your information, enclosed is a copy of such an opinion (by Mr. Hood, dated February 8, 1989). As already intimated, under Iowa law the payor is not entitled to the return of the money except by mutual consent, a crucial distinction that compels a different legal conclusion.


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