Considering Prepaid Funeral Plans? Read This First.

According to recent National Funeral Directors Association (NFDA) data, the median cost of a funeral and burial is $8,300. While this reflects a modest increase of 5.8% over the past two years, the actual cost is often much higher as the median doesn’t include additional expenses such as flowers, cemetery costs, and catering for the repast service. The median cost of a funeral involving viewing and cremation has increased more rapidly, meanwhile, by 8.1% over the last two years (for a total of $6,280).

As a result of these expenses, many people are now opting for prepaid funeral plans to alleviate the financial burden on their loved ones and to avoid making difficult decisions while mourning.

This post outlines available prepayment options and alternatives, ultimately helping you determine whether or not prepaying for your funeral expenses is best for you.

What are prepaid funeral plans?

As the name implies, a prepaid funeral plan allows individuals to make and pay for their funeral arrangements before they pass away. These plans—typically involving a formal agreement between the buyer and funeral home—outline specific end-of-life wishes and generally cover standard elements such as burial or cremation, caskets, burial plots, and headstones. Optional services are also often available such as obituaries, flowers, viewing and visitation services, funeral services, and family transportation.

How do prepaid funeral plans work?

Prepaid funeral plans operate in various ways depending on the type of plan you choose. Amongst several ways to prepay for funeral expenses, the most common are funeral trust funds, pre-need plans, and final expense insurance. Let’s take a closer look at each of these options.

Funeral trust fund

Depending on the state where you reside, one option for covering your funeral expenses is to set up a trust. Specifically, a prepaid funeral trust account is a contract you enter into with a funeral home or service provider whereby funds are managed by a third-party trustee.

Funeral trusts can be funded with either a lump sum or deposits made over time, with the funeral home designated as the account beneficiary. You can set up either a revocable or irrevocable funeral trust, with the level of control you have over the account pegged as the primary difference between the two.

Revocable plans offer more flexibility than pre-need plans (discussed in the next section) as you retain control of your assets and can typically cancel your contract without penalty or switch funeral home providers. These plans do have some limitations, however; for example, if the fund lacks enough money to cover all funeral costs at the time of your death, your family will need to pay the difference. Conversely, any excess funds are returned to your next of kin for their use.

Note funeral trusts generally don’t transfer from one state to another; if you set up a trust in New Jersey but pass away in Florida, for example, your family may have trouble accessing the account funds. Lastly, it’s important to note that assets held in a revocable funeral trust can impact Medicaid eligibility as they’re considered “countable” assets.

Irrevocable funeral trust accounts, meanwhile, have strict regulations and can only be used for funeral expenses; any funds remaining after covering these costs are returned to the state rather than your next of kin. Furthermore, irrevocable accounts cannot be changed, reversed, or dissolved—giving you less control over account assets. You can switch funeral home locations at any time, however, without the need to commit to a specific option upfront.

Irrevocable funeral trusts are typically most relevant for individuals who need to protect their assets from Medicaid as funds set aside are excluded from total net assets when determining Medicaid or Social Security Supplemental Income eligibility. It's important to note, however, that the trust must be established at least five years before applying for Medicaid benefits for funds to be excluded.

Pre-need plans

Pre-need funeral plans are purchased directly from a specific funeral home or cremation service provider that is in turn also listed as an account beneficiary. In buying a pre-need plan, you have the option to pay the provider via a one-time payment or otherwise installments. These plans are often ideal for individuals who don’t qualify for traditional life or final expense insurance given the lack of medical question/exam prerequisites and are also a good choice for those wishing to pre-plan their funeral arrangements.

One of the biggest advantages of pre-need plans is that they often lock in the cost of many funeral products and services specified in your agreement, thus relieving your loved ones of the financial burden should prices significantly rise. Pre-need plans also allow you to clearly express your wishes in advance—especially important if you want a specific cemetery plot—and many states allow buyers to cancel pre-need insurance if necessary and receive a full refund within a specified timeframe (though this varies by state).

Pre-need plans do come with their fair share of drawbacks, however. If the funeral home goes out of business, for example, receiving a refund may prove challenging depending on where you reside—as state laws vary regarding the protection of funds already collected. It's thus essential to understand potential implications. Additionally, your pre-need policy might not transfer if you decide to use a different funeral home. It's also important to note that loved ones won’t receive a payout as they would with life insurance products; term life or final expense policy coverage amounts typically eclipse those of a pre-need 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. A type of permanent whole life insurance, they typically offer smaller face values than standard life insurance products (ranging from $1,000 to $50,000) and are thus more affordable and particularly suitable for older individuals or those in poor health as the application process doesn’t require a medical exam.

Although these policies are designed for end-of-life expenses, they offer more flexibility than pre-need plans. Beneficiaries of one’s choice can use the death benefit for any purpose (e.g., taking a vacation), and the death benefit isn’t subject to taxation.

One of the biggest negatives regarding final expense insurance, however, is that these policies often provide less value compared to term life insurance—which often offers higher payout amounts at a lower cost. As with many insurance products, final expense policies are often confusing; it's therefore essential to shop around for a reputable carrier. If you already have a life insurance policy, meanwhile, adding a final expense policy may be unnecessary (especially if your existing death benefit sufficiently covers your expenses). As a result, final expense insurance is typically best suited for individuals who don’t qualify for traditional life insurance due to age/health issues or those who can’t afford traditional policy premiums.

Prepaid funeral plan alternatives

In our opinion, the most prudent approach is to build funeral expenses into your overall retirement plan rather than purchase a pre-need plan, apply for a final expense insurance policy, or establish a specific trust.

As life insurance can play a crucial role in retirement planning, allocating some policy proceeds specifically for a beneficiary (to fulfill your last wishes) is the ideal scenario. Insurance providers typically process claims within 14 to 60 days, and many funeral homes will even wait for policy funds to arrive before requiring payment.

Using a checking, savings, or money market account is also often a smart alternative to prepaying funeral expenses as these are FDIC-insured and can earn interest: potentially enough to cover inflation as it relates to funeral costs.

You can even take this one step further by establishing a bank account as a payable-on-death (POD) account, also known as a “Totten trust.” This arrangement provides a trusted family member or friend with access to funds immediately upon your death, ensuring your wishes are carried out as POD accounts bypass probate.

Other prepaid funeral plan considerations

Comparing funeral homes is relatively straightforward due to The Funeral Rule, enforced by the Federal Trade Commission (FTC) and mandating funeral directors provide pricing information over the phone. Furthermore, directors are required to furnish an itemized General Price List (GPL) outlining all available products and services when you visit a funeral home in person.

In sum: are prepaid funeral plans a good idea?

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 also offers several less-complicated ways to self-fund funeral expenses.

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

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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.