Read This Before Prepaying for Your Funeral Expenses

According to the latest National Funeral Directors Association (NFDA) data, the median cost of a funeral and burial is $7,848. While this number reflects only a modest increase of 6.6% over the past five years, the actual cost is often much higher as the median doesn’t include related expenses such as flowers, cemetery costs, and repast service catering. The median cost of a funeral with viewing and cremation, meanwhile, has increased at a more rapid pace (11.3%) over the last five years to reflect a price tag of $6,970.

As a consequence of these costs, many people now turn to prepaid funeral plans so their loved ones aren’t burdened with excessive funeral expenses or the need to make key decisions while they’re struggling emotionally. In this post, we’ll outline prepayment options and present alternatives to ultimately help you determine whether or not to prepay your funeral expenses.

Prepaid funeral plan overview

Just as the name suggests, a prepaid funeral plan involves making and paying for funeral arrangements prior to one’s death. These plans—often actual agreements between buyer and funeral home—detail end-of-life wishes and can include standard items such as burial or cremation, casket, burial plot, and headstone. Add-on items including an obituary, flowers, visitation and viewing services, funeral service, and family transportation are also available.

Different prepaid funeral plan types, including their pros and cons

While you can prepay for your funeral expenses in several ways, the most common are funeral trust funds, pre-need plans, and final expense insurance. Let’s discuss each of these in more detail.

Funeral trust fund
Depending on the state where you live, a trust is one option to pay for your funeral costs. More specifically, a prepaid funeral trust account is a contract you enter into with a funeral home or funeral service provider wherein funds are held with a third-party trustee.

These are either funded with a lump sum or deposits over time, with the funeral home listed as the account beneficiary. You can establish either a revocable funeral trust or irrevocable funeral trust account, with control as the largest difference in this regard.

While revocable plans are more flexible than pre-need plans (more on that shortly) as you retain control of your assets and can cancel your contract often without penalty (and/or change funeral home providers), they also have their limitations. For example, if the fund contains less money than total funeral costs at the time of your death, your family will need to pay the difference (by the same token, any excess funds are returned to your next of kin for use however they see fit). Funeral trusts also often do not transfer from state to state; so if you establish a trust in New Jersey but pass away in Florida, your family will likely encounter issues when trying to access account funds. Finally, assets held in a revocable funeral trust can also adversely affect your eligibility for Medicaid (which is considered a countable asset).

Irrevocable funeral trust accounts are more stringent in that they can only be used to pay for funeral expenses; therefore, any excess funds are sent back to the state rather than your next of kin. Irrevocable accounts also cannot be changed, reversed, or dissolved, giving you less control over account assets. Nevertheless, you can switch funeral home locations at any time as you don’t need to commit to a specific option up front.

Irrevocable funeral trusts are often only relevant for individuals who must shield assets from Medicaid because money set aside in the account is excluded from net assets at the time Medicaid or Social Security Supplemental Income eligibility is determined (that is, of course, if the trust is established at least five years before you apply and qualify for Medicaid benefits).

Pre-need plans
Pre-need funeral plans are purchased directly from a specific funeral home or cremation service provider who is also listed as the account beneficiary. If you purchase a pre-need plan, you’ll pay the provider directly in a one-time payment or across installments. These plans are often best suited for people who don’t qualify for traditional life insurance products or final expense insurance (as they don’t require medical questions/exams) and those with a strong desire to pre-plan their funeral arrangements.

One of the biggest benefits of pre-need plans is that they often lock in the price of many funeral products and services outlined in your agreement: a feature that helps absolve loved ones from the need to scrounge up additional funds should prices significantly increase. Pre-need plans also give you the option to state your wishes up front—especially important if you want a specific cemetery lot—and many states allow buyers to cancel pre-need insurance if necessary and receive a full refund within a specific timeframe that varies by state.

Nevertheless, pre-need plans do have some drawbacks—most notably that if the funeral home closes, obtaining a refund may not be so easy (state laws vary regarding the protection of collected funds, so be sure to understand any potential implications); your policy may in fact not transfer should you choose another funeral home. Additionally, loved ones won’t receive a payout as they would with life insurance products, with the pre-need policy coverage amount typically falling below that of a term life or final expense policy.

Final expense insurance
Another option to cover funeral and other end-of-life expenses is to take out a final expense policy (also known as “funeral” or “burial” insurance) from an insurance provider. These policies are a type of permanent whole life insurance product but often come with smaller face values than standard life insurance products (typically between $1,000 and $50,000): a feature making these policies more affordable than their traditional counterparts, and they are also well-suited for older people or applicants in poor health as the application process doesn’t require a medical exam.

While these policies are geared towards end-of-life expenses, they are also more flexible than pre-need plans as beneficiaries (anyone of your choosing) can use the death benefit for any purpose—even a vacation, for example. The final expense policy death benefit is also not taxable.

One of the biggest cons of final expense insurance, however, is that these policies often provide less value than term life insurance products (which sometimes provide higher payout amounts at a lower cost). As with many insurance policies, they are also sometimes unnecessarily confusing; you’ll therefore need to shop around for a reputable carrier. If you currently own a life insurance policy, adding a final expense policy is perhaps redundant—especially if your death benefit is large enough to cover your expenses—which is why this option typically best suits individuals who don’t qualify for traditional life insurance due to age or health issues and those who can’t afford traditional policy premiums.

How can you ensure your end-of-life wishes are honored without prepaying for a funeral?

The most prudent approach in this case is to include funeral expenses in your overall retirement plan rather than taking out a pre-need plan, applying for a final expense insurance policy, or setting up a specific trust.

For example, life insurance is often a key component of retirement planning; earmarking some of your existing policy proceeds so that your beneficiary can carry out your last wishes is therefore the most ideal scenario. Insurance providers typically pay out within 14-60 days of a claim, and many funeral homes will even wait for your policy funds to arrive before demanding payment for services.

A checking, savings, or money market account can also represent a smart alternative to funeral expense prepayments as they are FDIC-insured and will earn some interest—perhaps enough to cover the cost of inflation for funeral expenses.

You can even take this one step further and set up the bank account so that it’s payable-on-death (POD), also called a “Totten Trust.” Doing so will allow a trusted family member or friend to immediately access funds upon your death and carry out your wishes, as POD accounts bypass probate.

Other prepaid funeral plan considerations

All things considered, funeral home comparison shopping is rather simple as The Funeral Rule—enforced by the Federal Trade Commission (FTC)—requires funeral directors to provide pricing information over the phone. Additionally, directors are required to provide you with an itemized General Price List (GPL) featuring all products and services if and when you step foot into a physical funeral home location to learn more.

In sum: prepaid funeral plan pros and cons

We advocate for pre-planning your funeral rather than pre-paying for the same. Not only will the former help absolve grieving family members from making emotional decisions, but it will also provide you with several less complicated ways to self-fund your funeral expenses.

Still have questions about how to save for funeral expenses? Schedule a FREE Discovery call with one of our CFP® professionals.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.