Preplanning a funeral is difficult but can provide peace of mind. Prepaid funeral plans cover final expenses and spare family from tough decisions later. However, drawbacks exist too.
This comprehensive guide explores prepaid funeral plans in-depth. We’ll review the key components, financial considerations, alternatives, and legal implications. By the end, you’ll understand the pros and cons to determine if prepayment fits your needs.
Understanding Prepaid Funeral Plans
Prepaid funeral plans allow you to arrange and pay for all your funeral expenses in advance. Most funeral homes offer this service, but some third-party providers also exist.
With a prepaid plan, you work with a funeral home or provider to select every detail of the services and items of your funeral arrangements. This includes choosing between burial or cremation and selecting the casket, viewing the burial plot, flowers, and other aspects.
There are several beneficial reasons why someone may consider a prepaid funeral plan:
- Financial benefits – Paying funeral costs in advance can lock in prices at today’s rates and prevent inflation from driving up future expenses. Prepaid plans allow you to pay over time, reducing the burden on loved ones.
- Emotional relief for family – Your loved ones will appreciate not having to make difficult funeral decisions during their grief. Removing the financial stress of an unexpected funeral expense can also ease family tensions.
- Simplicity – All details and costs are arranged upfront, making the process smooth for family members at the time of death.
- Price negotiation – Funeral homes may offer discounts when you prepay for a package of services and items. This can amount to significant savings.
If you are interested in preplanning your funeral, the next step is contacting local funeral homes and providers to discuss your prepaid funeral options.
In the pre-paid funeral example, you notice that the funeral home is paid $7,500 from the interest-bearing trust account to cover the funeral expenses. You may also be wondering who collects the interest the account has earned.
In many cases, the funeral home will keep the interest as that is used to cover inflation and the rising cost of funeral services over time. However, make sure to read your contract and understand your state’s laws and practices; in some cases, the interest may be paid to your estate.
Key Components of a Prepaid Funeral Plan
Prepaid funeral plans generally include the core services and items needed for burial or cremation. The standard components may consist of:
- Funeral director services to make arrangements, obtain permits, prepare notices, etc.
- Transfer of the deceased to a funeral home
- Embalming or body preparation
- A casket or cremation container
- Use of facilities for viewing and funeral ceremony
- Hearse transportation for the casket or remains
- Grave liner or cremation urn
- Burial/cremation costs
Additional options, such as limousine transportation, specific floral arrangements, printed materials like prayer cards, catering, music, and more, may be available at added cost. The more prepaid components upfront, the higher the overall plan cost.
Customizing Your Prepaid Funeral Plan
While prepaid funeral plans cover the basics, most allow for ample customization to align with your wishes. Potential ways to personalize include:
- Selecting a higher-quality casket or urn
- Upgrading vehicle transportation
- Choosing specific flowers, music, images, rituals, etc.
- Purchasing extra catered refreshments
- Adding services like hair and makeup
- Specifying preferred funeral home, cemetery, crematorium
Customizations will increase your prepaid plan’s cost, sometimes significantly. Also, consider any legal or cemetery/crematorium rules that may prohibit specific customizations.
For example, cemeteries may have specific guidelines on burial vaults or casket materials like metal that are generally required for mausoleum burials. Discuss your preferences with the funeral home to customize thoughtfully within any constraints.
Pros and Cons
| Pros of Prepaid Funeral Plans | Cons of Prepaid Funeral Plans |
|---|---|
| Locks in funeral prices at today's rates | Risk of funeral home going out of business |
| Protects against future inflation on funeral costs | Limits ability to change plans later on |
| Allows paying over time through installments | Trust accounts vulnerable to poor investment returns |
| Eases financial burden on loved ones | May underestimate final funeral expenses |
| Relieves family from difficult decision making | Can complicate Medicaid eligibility |
| Permits personalization and customization | Money not accessible in emergency if needed |
| Discounts available when bundling services/goods | Forfeit funds if cancel or transfer plans |
What Does a Prepaid Funeral Plan Cost?
The cost of a prepaid funeral plan depends on several key factors:
Services Included – More goods and services bundled into the plan means higher upfront costs. Basic plans only cover professional fees, transportation, cremation or burial, and essentials. More comprehensive plans include caskets, flowers, catering, etc.
Customizations – Upgrading to higher quality caskets, urns, flowers, or specialty services increases costs. Sticking with standard options saves money.
Payment Type – Paying the full amount upfront is generally cheaper than making installments over months or years. Financing costs get added to installments.
Location – Funeral and cremation costs vary significantly by state and region. Plans in higher-cost-of-living areas carry higher price tags.
Inflation – Signing up earlier in life before prices rise allows you to lock in lower rates than waiting until closer to retirement.
Cremation vs. Burial – The national average cost of a basic cremation is $6,000-$8,000, while the average basic burial runs $9,000-$12,000.
Under the FTC Funeral Rule, funeral homes must provide a General Price List clearly outlining their pricing for items and services. This allows consumers to assess costs when considering prepaid plans accurately.
Request quotes from a few funeral homes in your area for essential and more inclusive prepaid funeral plans for accurate pricing. Most reputable providers will provide free itemized quotes for comparison.
Average Cost of Prepaid Cremation Plans
| Plan Type | National Average Cost |
|---|---|
| Basic cremation | $6,000 - $8,000 |
| Cremation with memorial service | $7,000 - $9,000 |
| Cremation with funeral ceremony | $8,000 - $10,000 |
Average Cost of Prepaid Funeral Plans
| Plan Type | National Average Cost |
|---|---|
| Immediate burial | $9,000 - $12,000 |
| Burial with memorial service | $10,000 - $13,000 |
| Burial with funeral ceremony | $11,000 - $14,000 |
Financial Considerations for Prepaid Funerals
Planning financially for your funeral in advance is an important part of end-of-life preparations. With average funeral costs exceeding $7,000 in the US and continuing to rise, prepaying your funeral expenses can provide price protection. However, prepaid funeral plans also come with financial considerations to weigh.
Payment options, tax implications, inflation protection, and risks like funeral home business closures are all factors to consider. Understanding these financial elements will help you decide whether prepaying funeral expenses is optimal for your situation. Weighing the pros and cons of funeral prepayment plans from a financial perspective can give you peace of mind that you are making the right choice.
How Prepaid Funeral Plans Are Funded
Once you select a prepaid funeral package, there are two main options for funding it:
Insurance-Funded Plans
Many funeral homes fund prepaid plans by purchasing a life insurance policy to cover the funeral expenses.
The funeral home acts as an agent for the insurance company, selling you a small ($10,000 – $25,000) whole life insurance policy when you sign up for the prepaid plan. You are listed as the insured on the policy.
Ownership of the policy is then assigned to a third party, usually an irrevocable trust set up by the insurance company. This trust is designated as the beneficiary who will receive the payout upon your death.
Assigning policy ownership to the trust ensures the insurance company pays the proceeds to the right entity when you pass away. The trustee then allocates the payout to the funeral home to cover the expenses outlined in your prepaid contract.
The prepaid contract must fully detail which funeral goods and services are covered under the plan. Any insurance money not used for the specified funeral items would go to your estate rather than staying with the funeral home.
Trust-Funded Plans
With a trust-funded prepaid plan from a funeral home, your payments go into an interest-bearing account managed by the funeral home or third-party trustee. The funds grow over time until needed to pay for funeral expenses upon your death.
However, state laws vary regarding how much of the payments must go into the trust. In some states, funeral homes only have to deposit a percentage like 60% into the trust, while keeping a portion like 10% for fees. They may also be able to withhold funds from the trust if you miss payments.
If you cancel the plan, some states let the funeral home keep up to 30% of the trust value as a cancellation fee. So, it’s important to understand the specific regulations and risks of trusting prepaid funds to a funeral home.
You also have to choose whether to structure the trust as irrevocable or revocable when signing the contract:
- Irrevocable trusts permanently lock in the contract terms and do not allow refunds if canceled. But they may exempt assets for Medicaid eligibility purposes.
- Revocable trusts allow you to change terms and receive a refund if canceled. But they typically don’t provide Medicaid exemptions.
Ask the funeral home directly about how they finance prepaid plans. While you typically don’t get to choose between insurance or a trust, understanding their funding approach can give you greater confidence.
Payment Options for Prepaid Funeral Plans
When purchasing a prepaid funeral plan, you typically have two main payment options:
Lump Sum Payment
The first is to pay the full amount in a lump sum upfront. This allows you to pay today’s prices in full at the time of purchase. After the payment, you don’t have to worry about further costs. Your plan is considered paid in full.
Installment Payments
The second option is making installments over an extended period, which breaks the total costs into more manageable monthly payments.
If paying in installments, it’s important to consider what happens if you pass away before all payments are completed. In most cases, the funeral home will still be obligated to carry out the prepaid services in your contract, even with outstanding payments. However, your family may be responsible for paying the remaining balance. Having life insurance or final expense insurance can help cover any unpaid balances.
Funeral homes offer various installment schedule options, such as paying over a set number of years or until a certain age, like 85 or 90. Interest is not typically charged on funeral installment plans.
Payment amounts are fixed at the time of purchase, so they will not increase over the installment period. However, some additional fees may apply depending on payment processing.
Installment plans allow you to spread costs over time, while lump sum payments minimize finance charges. Evaluate both options to choose the right fit. Be aware that if you are over the age of 90, most funeral homes will not accept payment plans, limiting your options to either paying for your funeral in one payment or seeking alternative options.
Tax Effects When Prepaying for Funerals
In most cases, prepaid funeral expenses are not tax deductible. Payments for a prepaid plan usually won’t lower your taxable income.
If your estate exceeds federal or state estate tax exemption limits, prepaying funeral costs may help minimize estate taxes. The funeral expenses can reduce the total value of your taxable estate.
There are no income tax advantages to prepaying funeral expenses. However, paying for a funeral in advance can potentially lower future estate taxes depending on the value of your assets. Consult a tax advisor to understand any implications for your situation.
Inflation and Cost Increases
Funeral costs have been rising steadily at a rate of 5-10% annually in recent decades. Locking in funeral goods and services at today’s prices with a prepaid plan can lead to significant savings over paying in the future.
Most prepaid plans guarantee the prices in the contract. However, verify if there are any non-guarantees in the contract. For example, what happens if the funeral home increases prices for items not covered in your prepaid plan? Also, confirm the plan is transferable to another funeral home if yours goes out of business.
While prepaid plans can help hedge against inflation, make sure your funds are safely held in a guaranteed and transferable trust or insurance policy. Review the plan’s protections against rising funeral costs before enrolling.
Important Questions to Ask Before Choosing a Prepaid Funeral Plan
Before enrolling in a prepaid funeral plan, make sure to have the following key questions answered:
- Is the prepaid funeral plan a life insurance policy or a trust?
- What funeral goods and services are included in the base plan cost?
- What would be considered add-ons or upgrades for extra fees?
- What are the policies for canceling the plan or transferring to another funeral home? Are there any fees or penalties?
- Does the plan come with consumer protections like a money-back guarantee, price lock, or the ability to cancel anytime?
- Will the plan restrict my family’s ability to make funeral modifications or changes later on? Is there flexibility?
- Does the plan follow all state and federal prepaid funeral services and trust account regulations?
Before committing to a prepaid funeral plan, clarity on what’s covered, flexibility, cancellation policies, and consumer protections are essential.
Red Flags and What to Avoid
Be wary of the following red flags when evaluating prepaid plans:
- Funeral homes operating without proper licensing and credentials in your state.
- Vague pricing structures or hidden fees buried in fine print. Ask for clearly defined costs.
- Poor reviews and complaints indicating predatory sales tactics or bad business practices.
- Lack of price lock guarantees or mechanisms to transfer funds if the business closes.
- A funeral home that requires you to make the payments directly to the funeral home or the funeral director. Payments should always go to either the bank or life insurance company.
Any lack of transparency around pricing, inflexible cancellation policies, or missing consumer protections should give you pause about purchasing a plan. Scrutinize plans carefully and avoid providers with concerning red flags.
Communicating Your Prepaid Funeral Plans with Family
Discussing your prepaid funeral plans openly with family members is critical. Clear communication can:
- Ensure your wishes are followed exactly as you intended.
- Alleviate stress and guesswork for grieving loved ones.
- Answer any questions or concerns from family members while you are able.
Bring up the conversation gently, explain your reasoning, share details about the plan, and allow space for feedback. Handling the discussion with empathy can smooth the emotional challenges of this sensitive topic.
Legal Documentation
Supplement your conversations by legally documenting your prepaid funeral plans through:
- Your last will and testament that is executed properly.
- Advance funeral directives that specify details like cremation vs. burial.
- Written instructions are stored with your plan paperwork.
Inform your executor or family members where these documents are located. Keep them updated if plans change. Legal paperwork reinforces your prepaid funeral wishes.
Emotional Considerations
Many family members will appreciate you prearranging and funding your funeral. However, certain aspects, like cremation versus burial, may be emotionally difficult for them.
Have honest yet compassionate conversations.
Explain your reasoning while acknowledging their feelings. Compromise if possible or agree to disagree respectfully. With sensitivity to the emotions involved, you can find resolution and alignment on how to honor your wishes.
Prepaid Funeral Plans vs. Traditional Funerals
When making end-of-life arrangements, consider all your options carefully. In this section, we’ll compare prepaid funeral plans and traditional funerals across three key aspects: costs, flexibility, and ease of planning.
Understanding the differences between these two approaches is essential for making an informed decision that aligns with your needs and preferences.
Costs
Prepaid Funeral Plans: These plans offer the advantage of locking in today’s prices for funeral goods and services. This means that you pay for your funeral at current rates, which can be advantageous considering the rising costs of funerals. Prepaid plans can help you avoid potential inflation-driven price increases.
Traditional Funerals: Traditional funerals often involve paying for services and products at the time of need, which means you’re subject to the prices at that future date. Funeral costs have been steadily increasing, so traditional funerals may be more expensive when the time comes.
Flexibility
Prepaid Funeral Plans: Prepaid plans allow for customization, letting you choose specific details like the type of casket, ceremony, and other funeral elements. However, customization can sometimes come at an additional cost.
Traditional Funerals: Traditional funerals offer flexibility in planning but may involve last-minute decisions during a difficult time. Families might have to make choices quickly, potentially leading to added stress and uncertainty.
Ease of Planning
Prepaid Funeral Plans: These plans are designed to simplify the funeral planning process. All details and costs are arranged upfront, making it a smoother experience for family members at the time of death. This can relieve loved ones from making challenging decisions during their grief.
Traditional Funerals: Planning a traditional funeral typically involves coordinating various aspects, such as choosing a funeral home, selecting a casket, arranging transportation, and more. This can be a more complex and time-consuming process for grieving family members.
Prepaid Funerals and Medicaid Eligibility
Many people consider using Medicaid to cover long-term care costs. However, Medicaid has strict asset limits that prepaid funeral plans can impact.
Medicaid requires spending down assets to qualify. Funds for irrevocable prepaid funeral plans may be exempt, while revocable plans usually count toward the asset limit. Medicaid-compliant plans exist but vary by state.
Understanding how prepaid funeral plans fit into Medicaid eligibility is crucial when planning for later life expenses.
Legal Considerations
The revocability of a prepaid funeral plan is key for Medicaid eligibility:
- Irrevocable plans may not count toward asset limits, while revocable plans likely will.
- State Medicaid rules differ regarding asset exemptions for funeral plans.
Consult an elder law attorney to ensure your prepaid funeral plan does not jeopardize potential future Medicaid coverage. They can help craft an exempt plan compliant with laws in your state.
Alternative Way to Cover Funeral Expenses
While prepaid funeral plans can provide price locks and simplicity, they also come with financial risks like funeral home closures. Having backup funding alternatives for funeral costs is prudent financial planning.
Beyond prepayment, other options exist, like final expense insurance, payable-on-death accounts, and crowdfunding campaigns. Each approach has pros and cons to weigh. Evaluating these alternatives as your primary funeral funding method or as a backup plan can provide peace of mind knowing costs will be covered.
Examining prepaid plans alongside other alternatives gives a complete picture of how to prepare for end-of-life expenses financially.
| Aspect | Prepaid Funeral Plans | Final Expense Life Insurance | Payable-on-death Accounts | Crowdfunding |
|---|---|---|---|---|
| Quick Access to Funds | Yes (upon death) | Yes (upon death) | Yes (upon death) | Yes (immediate) |
| Flexibility | Limited customization | Beneficiaries decide usage | Joint account control | Variable, may not cover all expenses |
| Premiums | Paid upfront or in installments | Fixed premiums | No premiums, direct deposit | None |
| Coverage Amounts | Set based on chosen plan | Usually lower (up to $50,000) | Account balance | Variable, depends on donations |
| Tax Implications | Varies depending on plan | Usually no tax implications | Potential inheritance tax | None |
| Approval Process | No approval required | Simplified underwriting | None (account setup) | None |
| Cons | Limited usage, potential fees | Smaller benefit amounts | Joint account control | Unpredictable fundraising |
Final Expense Insurance Policies
While prepaid funeral plans through funeral homes provide certain guarantees, final expense life insurance policies can offer families much more flexibility and security.
With a final expense insurance policy, your loved ones receive a fixed payout that can be applied towards any funeral expenses rather than being restricted to one funeral provider’s costs. This gives families freedom in a difficult time.
Additionally, the policy death benefit is paid no matter when or where death might occur, unlike prepaid plans that lock you into a specific funeral home. By purchasing a policy through a reputable national insurance carrier, you have an added layer of security, knowing your benefit is backed by a financially sound company instead of a small local funeral home that could go out of business.
Insurance agents can also better advise you on the appropriate policy amounts and features needed rather than prepaid packages, which may underestimate future expenses. For many, final expense life insurance can be a wiser choice than a prepaid funeral plan.
Specific advantages of final expense insurance include:
- Simplified application process with limited medical questions
- No medical exam is required
- Premiums that do not increase once the policy is issued
- Ability to designate the payout to a beneficiary or estate
- Protection against inflation reducing the payout’s purchasing power
Payable-on-Death Accounts and Joint Bank Accounts
With a payable-on-death (POD) bank account, you designate a beneficiary who can withdraw the funds upon your death to pay for final expenses. Joint bank accounts similarly provide account access to another person to cover costs after you pass away.
Opening a POD account involves filling out a form at your bank designating funeral beneficiaries. Joint accounts simply list co-owners on the account who retain access after you die. Both approaches sidestep probate.
The risk with joint accounts is the co-owner withdrawing funds early for other purposes. POD accounts carry less risk of premature withdrawal. Overall, POD accounts and joint bank accounts present simple alternatives to fund funeral costs outside of prepaid plans.
Crowdfunding and Donations
If you don’t have insurance or a prepaid plan, crowdfunding funeral costs through an online campaign is an option. Platforms like GoFundMe facilitate raising funds from friends, family, and the community.
Pros include ease of setup and the potential for quick support. Cons are the public nature of campaigns and the lack of funding guarantees. Ethically manage any donations received and communicate funeral funding needs delicately.
While crowdfunding lacks predictability, it can serve as a backup fundraising approach if affordable insurance and prepaid plans are out of financial reach. With careful planning, crowdfunding can cover unexpected funeral costs.
Frequently Asked Questions
How do I know if a prepaid funeral plan is a good value?
Get itemized price quotes from at least three funeral homes to compare costs for the same services. This allows you to identify the best value.
What happens if prices change after I purchase a prepaid funeral plan?
Most plans lock in set pricing. However, verify the plan covers funeral home price increases.
Can I cancel or get a refund on my prepaid funeral plan?
Cancellation policies vary. Understand the plan’s portability and whether refunds are available if you change funeral homes.
Will a prepaid funeral plan affect my Medicaid eligibility?
Irrevocable plans may not count toward Medicaid asset limits. Consult an elder law attorney for state-specific guidance.
What if my family doesn't follow my prepaid funeral wishes?
Supplement your plan with legal documents like wills and final directives to ensure your instructions are followed.
