Prepaid Funeral Plans: Are they worth it? (2022 Pros & Cons)

A prepaid funeral plan allows you to pay for your funeral arrangements before you pass away. This not only saves your loved ones the financial and emotional stress of having to make decisions while grieving but also ensures that things are taken care of just the way you had wanted.

Now, there are different ways of doing it. You can directly pay the funeral home ahead of time or make your payment through a prepaid contract provider, depending on your financial concerns and preferences. These policies typically range between $10,000 and $25,000 with monthly installments payable directly to the funeral home.  

Summary:

• Plan and set aside money for your funeral ahead of time.
• Policies generally range from $10,000 to $25,000. Specify the arrangements you want and choose the one that best matches your budget.
• Pay your monthly installments directly to the funeral home or opt for a prepaid contract provider to take care of your payment schedule.
• The funeral home will have sole access to the money you choose to set aside for your funeral.
• The expenses may be tax-deductible if the estate pays the prepaid funeral costs.
• Please note that every prepaid funeral plan comes with its own set of financial risks and benefits.

The typical range of prepaid funeral policies is between $10,000 and $25,000. There are several payment options available, enabling you to choose according to your financial capabilities. The entire amount can be paid upfront, or in installments with a three, five, or ten-year plan.

You also need to anticipate some additional fees besides the cost of the funeral. This may include administrative setup fees of $100-$200, or yearly maintenance fees ranging from $50-$150.

Are Prepaid Funeral Expenses Tax Deductible?

It’s only normal for you to wonder whether funeral expenses are tax-deductible. Well, it’s important to note that most prepaid funeral expenses are not tax-deductible for individuals. However, the rules change when the burial costs are covered by the estate.

As per IRS regulations, an estate is allowed to use the expenses against its taxes as a deduction if it uses a prepaid plan to pay the funeral costs.

The tax-deductible aspect of prepaid funeral expenses can be quite difficult to comprehend at times. You should always consider consulting a tax professional to make the right decisions and avoid costly mistakes.  

Should You Prepay Funeral Expenses?

While purchasing a prepaid funeral plan seems like a feasible solution, the truth is, there are several risks involved with pre-paying for your funeral and working directly with funeral homes. In fact, there are more shrewd and cost-effective ways of paying for your burial.

Detailed investigation performed by state and federal authorities on funeral homes and pre-payment providers has cast light on alarming violations of trust.

That’s because most of these plans don’t have a lot of regulatory oversight, allowing funeral homes to exploit the loopholes and embezzle your funds. Shockingly, some funeral homes even go out of business even before the need for your last arrangements arises.

Others sell policies that don’t make a lot of sense from a financial perspective. While the Funeral Rule passed by the federal authorities in 1984 offers some consumer protection, state laws are not that impactful and do not always work in favor of consumers.

Putting things into perspective, you may consider taking out a small, final expense life insurance policy as an alternative to purchasing prepaid funeral plans. These policies are highly regulated by several state and federal authorities, offer more flexibility, and come with fewer financial risks associated. 

What Coverage Do You Get With a Prepaid Funeral Plan?

Prepaid funeral plans typically come with a wide array of customizations, allowing you to include the services and goods you want for your funeral. These policies cover all the costs of your last arrangements, ranging from the funeral home services to flowers, casket, transportation, and everything in between. The director of the funeral home you choose to work with will quote a final price once you’ve made a complete list of everything you want to be included in your policy.

When purchasing a guaranteed prepaid funeral plan, all the exact goods and services you want for your funeral are specified, and the price you agree to pay is locked in. This protects your loved ones from the hassle of having to meet additional expenses even if the prices were to rise in the future. Please note that non-guaranteed plans don’t come with such protection.

How to Get Started?

You can either work directly with the funeral home or opt for a prepaid contract provider while paying for a prepaid funeral plan. These providers collaborate with multiple funeral homes and take care of all the arrangements for the plan payments. A payment plan will be set up with the funeral home or provider after you select all the goods and services you want for your funeral.

You need to have a comprehensive understanding of the pros and cons of prepaid funeral plans before thinking about purchasing one.

Pros:

• Allows you to pay in advance and take care of all the details of your funeral so that your loved ones do not have to handle the stress of making the arrangements after you’re gone.
• You get to ensure that your funeral is handled just the way you have envisioned. You can even choose the type of funeral and the cemetery plot you wish you lie in.
• Guaranteed plans enable you to lock in the current market prices for your last arrangements, meaning that your family members wouldn’t need to pay any additional fees if the prices were to go up.
• Purchasing a prepaid plan can be really useful if you are adamant about a specific funeral home handling your final arrangements.  This ensures that your final wishes are honored.  

Cons:

• Despite your best efforts, your loved ones could be forced to pay for your last arrangements if the funeral home you choose goes out of business due to some reason.
• Most prepaid funeral plans are non-transferable and complexities could arise if you choose to relocate or die in a different location. The funeral home you choose may or may not transfer the policy to a new funeral home.
• These plans are often non-refundable, meaning that you may not be entitled to a refund if you change your mind later on and decide to pay differently for your funeral.
• Purchasing a prepaid funeral plan can take a toll on your savings. Your family may not be left with sufficient funds to pay your medical bills and cover other end-of-life expenses.

Purchasing a funeral insurance policy, also known as final expense insurance or burial insurance, is one way of paying for your funeral expenses ahead of time.

These life insurance policies allow you to assign a beneficiary, such as a family member or a trusted friend, to receive the death benefit.

While prepaid funeral plans come with their own set of limitations, life insurance benefits can be used to cover a variety of costs.

In addition to paying for funeral expenses, beneficiaries can also use them for the payment of medical bills, credit card debt, utility costs, and more.

Some states also allow you to list a funeral home as your beneficiary. In that case, your family will have to trust the funeral home to handle your death benefit with professionalism, honesty, and integrity.

However, you must be aware of the fact that there may not be any funds left over for your family if you make a funeral home your beneficiary. 

Average Funeral Expenses

Funerals can be costlier than you would have ever imagined. According to a survey conducted by The National Funeral Directors Association (NFDA), the median cost for a funeral without a vault was $7,848 in 2021. The expenses escalated to a whopping $9,420 including the vault. Surprisingly, these figures do not include the burial plot, headstone, or obituary. Here is the median funeral cost checklist as published by the NFDA in 2021:

Comparison Between Prepaid Funeral Plan and Funeral Insurance

A prepaid funeral plan might seem similar to a funeral insurance policy. However, there is a fine line of difference between the two. In the case of a prepaid policy, the payments are made directly to the funeral home that has sole access to the money. However, your family may or may not have to cover additional funeral expenses, subject to the plan being guaranteed or not.

On the contrary, a funeral insurance policy makes room for more flexibility. These policies allow you to assign any beneficiary you want. The assigned beneficiary has the liberty to use the payout for your funeral expenses, final utility payments, medical bills, and other outstanding expenses. Any leftover money will be at your beneficiary’s discretion for use.

• An interest-bearing account is used for the deposition of the payments.
• The money you invest accumulates interest throughout your lifespan and is used by your survivors to pay for your funeral.
• Funeral homes have varying degrees of authority over your money due to the difference in state laws.
• Your Medicaid qualification criteria aren’t affected by the purchase of a prepaid funeral plan.
• The funeral amount is capped from $5,000-$15,000 by many states.
• Designating a joint bank account allows immediate access to funds without having to wait for estate settlement.
• You can name a beneficiary while setting up a Payable on Death (POD) account. However, you will remain in charge of the funds until you pass away.

You will receive a trust-based pre-payment plan if you choose to work directly with the funeral home. Your payments will be deposited into an interest-bearing account and the money will accumulate interest until you breathe your last. Once you pass away, your survivors can use the money to pay for your funeral.   

However, there is more to it than you think. The funeral home is only required to put up to 60% of the payments into the account, depending on the state you live in.

In addition, they can keep up to 10 percent or more for administrative fees and even lock the trust and use your money to pay their administrative fees if you miss your payments due to some reason.

It might be surprising but things can actually get worse if you decide to cash out the trust. Some states allow funeral homes to keep up to 30 percent of your hard-earned money.

Irrevocable vs. Revocable Trusts

The difference between the two is very simple. Putting pen to paper on an irrevocable trust means that the contract between you and the funeral home is permanent and can’t be altered under any circumstances to claim a refund. This is also essential for you to qualify for a Medicaid exclusion.

On the contrary, signing a revocable trust allows you the freedom and the peace of mind to change your decision and receive a refund.

Ask yourself the following questions before purchasing a prepaid funeral plan:

• Does the policy make sense financially?
• What is the pay-off duration of the policy?
• What happens when a person passes away before making all the payments toward the policy?
• What if the funeral home closes or changes ownership even before your last arrangements take place?
• Does your state have adequate consumer protection laws to preserve your best interests?
• What exactly are the funeral benefits that you get for your investment?
• What happens if you relocate to a different city or die elsewhere?
• What happens if the prices of the goods and services you choose go up before you pass away?
• How does the interest accumulated on the payments affect the overall scheme of things?
• Are you entitled to a refund if you change your mind and look for other options?
• Who gets the leftover money after your funeral?  

Prepaid Funerals & Medicaid

Purchasing a prepaid funeral plan won’t affect your eligibility to qualify for Medicaid. However, please note that several states limit the amount you can put in a funeral trust from $5,000 to $15,000.

Popular Prepaid Funeral Arrangements & Services

While not all prepaid funeral insurance plans are the same, you can customize your policy with the specific goods and services you want. However, you must keep in mind that the policy amount is directly impacted by the choices and decisions you make. Here’s a brief overview of what most preset plans include: 

• Funeral home expenses
• The death certificate
• Clergy expenses
• Burial cost 

Please note that funeral expenses such as the cost of the casket, headstone, or cemetery plot are not covered by all funeral plans. In most cases, you can work directly with a funeral home to purchase a customized plan that meets your financial requirements. 

Creating a Joint Bank Account

A person’s assets may be temporarily unavailable to his or her family members upon death until the estate is settled. Even if there are funds available in the account, their loved ones will still not be able to make use of it to pay for the funeral.

Setting up a joint account can solve the problem, with the designated survivor having immediate access to the funds.

If you find it difficult to make consistent deposits and leave the balance alone, consider choosing other options that better suit your needs.  

Setting up a Payable on Death Account

A Payable on Death (POD) Account is also known as Totten Trusts, deriving its name from a 1904 New York court decision. This type of account can be set up through your bank and allows you to name a beneficiary to whom the funds will be available upon your death.

However, you will have the right to withdraw money, move or close the account, or even change the beneficiary, while you are alive. Please note that a POD account avoids probate.  

Using an Existing Life Insurance Policy

You can also use an existing life insurance policy, either term life or whole life, to cover your funeral costs. You need to make sure that your beneficiaries know exactly what fraction of the death benefit they should be using to plan for your last arrangements.

Having said that, however, it is imperative to state that term insurance can expire before a person’s death, and if not renewed, leaves no death benefit to the beneficiary. 

Purchasing a Final Expense Policy

Also known as burial insurance or funeral insurance, this is a type of life insurance policy that can be purchased from insurance companies.

A final expense policy not only provides full coverage for funeral expenses but also includes other end-of-life costs, including medical bills, hospice care, and more. In most cases, you need to answer a few health-related questions while purchasing this policy. These plans offer death benefits ranging between $10,000 and $25,000.  

Family Communication is Essential, Irrespective of the Policy You Choose

You might include all the details of your prepaid funeral policy in your will, but there are high chances that your grieving family members won’t read it before the funeral. Hence, make sure to communicate the details of your prepaid funeral policy with your family.

Conversely, some people put in a lot of effort in choosing the prepaid funeral plan or insurance policy that best suits their family but fail to communicate the same to them. The family members typically discover the policies kept securely in a safe deposit box much after the funeral. 

In either situation, your best efforts to secure your loved ones financially during a tough time would go in vain as your family will be without the knowledge of your funeral policy and ultimately end up making arrangements and paying for it. No matter what prepaid plan you opt for, it is important that your family members are aware of the arrangements and have access to the important documents.