Should you prepay funeral expenses?
When it comes to paying for your funeral arrangements, prepaid plans have significant disadvantages of burial of this type that you should consider before you buy.
What are the pros and cons of a prepaid funeral?
While, on the one hand, prepaid plans offer peace of mind and often cost less than if you were to plan a funeral at the time of death. However, a funeral prepayment plan can also be inflexible and may not cover all of your funeral expenses.
Moreover, there are alternate ways to pay for your final expenses (burial insurance, otherwise known as final expense insurance or funeral insurance) that may give you the same benefits as the best prepaid funeral plan, without all of the downsides.
(Note that this applies equally well to prepaid cremation plans!)
Let’s dive in.
You never know what battles people may be fighting.
What Are Prepaid Funeral Plans?
And how does a prepaid funeral plan work?
Pre-paid funeral expenses are a way for you to plan in advance.
The average funeral now costs nearly $10,000 (excluding the burial plot cost). Without some effort to save money, one’s end-of-life expenses can burden family members.
By prepaying funeral expenses, you can lock in today’s prices and avoid the burden of financial planning on your loved ones. Here’s how prepaid funerals work:
When you prepay for a funeral, you pay for the cost of goods and services at today’s prices. This means that even if the cost of funeral services rises in the future, you will not have to pay any additional costs.
With pre-paid funeral plans, your family will not have to worry about funeral costs or funeral planning during such an emotional time. Instead, the funeral home will take care of everything according to your wishes.
What Is Not Included In A Prepaid Funeral Plan?
While prepaid funeral plans do offer peace of mind, it’s important to know that they may not cover everything.
For example, many plans do not include the cost of a gravesite or tombstone/marker. Additionally, the funeral plan cover may only affect a portion of the total expenses.
It is important to read the fine print of your plan to see what is and is not included.
When Should You Buy a Prepaid Funeral Plan?
You can buy a prepaid funeral plan at any time.
However, it is generally best to purchase a plan when you are younger and in good health. This is because the cost of a funeral tends to increase with age, and if you wait until you are older, you may not be able to afford the plan you want.
Types of Prepaid Funeral Plans
There are two primary methods to prepay for a funeral:
The first method is to establish a trust (a revocable trust or an irrevocable trust):
You’ll almost certainly sign a contract agreeing to pay for the burial expenses in monthly payments, which will be deposited into an interest-bearing account. After you’ve died, the funeral director (or someone you choose if state law applies) and trustee will use the money to make arrangements.
This trust, like a revocable trust, allows you to pay for your funeral in installments, but it is a permanent trust that can’t be changed by anybody other than the trustee.
Pre-need insurance is a whole life insurance policy that is used to pay for funerals in most states. It’s a specialized insurance plan paid out either all at once or over time.
The premium and payment amount are not taxed by the government.
So why would you leave your family with a $10,000 final expense bill?
The Disadvantages of Prepaid Funerals
- Prepaid funeral plans can be inflexible. This means that if you change your mind about any aspect of the funeral, you may not be able to make changes to the prepaid plan.
- Pre-paid funerals plans may not cover all of the costs associated with a funeral. For example, they may not cover the cost of a burial plot or a headstone.
- If you move to another city or state, your prepaid funeral plan may not be transferable. You would have to cancel the plan and purchase a new one.
- Can you get a refund on a prepaid funeral? If the funeral home goes out of business, your prepaid funeral cost may not be refundable.
- You may not be able to get a loan to cover the cost of prepaid funerals. This is because banks typically consider them to be unsecured loans.
The FTC’s Issues With Prepaid Funeral Plans
When the Federal Trade Commission tells you to be careful about buying a product, that opinion means something.
Issues To Raise When Shopping For A Prepaid Funeral Plan
- What are you getting for your money? Are you just purchasing goods, such as a casket and vault, or do you also get funeral services?
- What happens to the money you’ve already paid? There are several ways that states regulate prearranged funeral service payments.
- What happens to interest income earned on money placed in a trust account before it is spent?
- Are you protected if the firm you work with goes bankrupt?
- Can you cancel your contract and receive a full refund if you change your mind?
- What if you move to a new location or pass away while traveling? Some pre paid funerals plans can be transferred, but this is generally a hefty fee.
Be sure to tell your family about your plans; let them know where the documents are filed. If your family isn’t aware that you’ve made plans, your wishes may not be fulfilled.
And if family members don’t know that you’ve prepaid the funeral costs, they could end up paying for the same arrangements!
Laws Around Prepaid Funeral Plans
Laws of individual states govern the prepayment of funeral goods and services; various states have laws to help ensure that these advance payments are available to pay for the funeral products and services when needed.
But protections vary widely from state to state, and some laws offer little or no adequate protection.
Some state laws require the funeral home or cemetery to place a percentage of the prepayment in a state-regulated trust or to purchase a life insurance policy with the death benefits assigned to the funeral home or cemetery.
Alternatives to Prepaid Funeral Plans
There are many better options for prepaying your funeral.
Joint Bank Account
One option is a joint bank account with a designated beneficiary. You can fund the account with as much or as little money as you want, and the money will go directly to your beneficiaries when you die.
No fees are associated with this type of account, and it offers flexibility in how the money is used. Your beneficiaries can use the money to pay for your funeral, or they can use it for any other purpose.
Payable on Death Designation
Another option is to designate a payable on death (POD) beneficiary for your bank accounts. This designation allows you to name someone who will inherit the money in your account when you die.
Like a joint bank account, there are no fees associated with this designation, and your beneficiaries can use the money for any purpose.
Burial Insurance (a.k.a Final Expense Insurance)
When you purchase burial insurance, you’re essentially buying a policy that will cover the costs of your funeral and final expenses. Traditionally, these policies are whole life insurance policies, which means they cover you for your entire life. But how does it work?
Here’s how burial insurance works: the death benefit pays out when the policyholder dies, and the money can be used to cover funeral costs, pay off debts, or be distributed to loved ones. The key is to make sure you purchase enough coverage to cover all of your final expenses.
Unlike prepaid funeral plans, life insurance plans are not tied to a specific funeral home or geography in which you live.
Prepaid funerals pros and cons can get you confused. These plans may be tempting because you can go through your local funeral provider (where you may even know the funeral directors on a first-name basis!), but they have severe disadvantages that you should be aware of before you make a decision.
Be sure to understand the terms of your contract, and tell your family about your plans. There are many better options available, so be sure to explore all of your options before you make a decision.