Prepaying Your Funeral: Benefits and Dangers

Monday, 26 November 2007 14:44

What is Preneed?

"Preneed" is a term coined by the funeral industry to describe the arrangement and payment of a funeral prior to death. Obviously, if you are to have any say in it, you must plan in advance of your death. "Prearrangement" is also used interchangeably with "preneed".

The marketing of preneed plans for funeral services and merchandise is increasingly prevalent. Everyone connected with the funeral industry is promoting preneed purchases. Various companies, including insurance companies, "for-profit cremation societies," and "preneed associations" flood the mail with advertising which touts the benefits of their preneed plans. There are a number of pitfalls, as well as options, about which consumers should be well-informed. Therefore, we say, "Let the buyer beware."

Advantages of Planning

There are several advantages to planning your funeral:

You may choose the type of funeral service you desire.
You will save your survivors from making choices during the stress of bereavement.
You can do comparison shopping at available mortuaries.
You can make knowledgeable decisions.
You will be stimulating family discussion, sharing, and decision-making.

Financing a Funeral

There are three basic ways to set aside money for funeral arrangements:

Totten Trusts. This is an individual trust or savings plan earmarked for one's funeral. The consumer controls the account and can withdraw from it at any time. Usually a sum of money equal to today's funeral costs is deposited in a passbook, certificate of deposit (CD), or money market account, payable to a beneficiary of your choice. These funds will be available immediately at the time of death without the delay of probate. Accumulated interest covers costs increased by inflation. Annual interest is subject to income tax.
Regulated Trusts. All states, except Alabama, Vermont and the District of Columbia, regulate the sale of commercial trust agreements. Regulated trust laws provide for some consumer protection, specifying the portion of your money which must be deposited in a bank or savings and loan. But only about half of states require that 100% of your prepaid funeral money be put in trust. Unless designated as "irrevocable", individual savings and regulated trusts are subject to claim by the state if you receive social benefits.
Insurance-Funded Plans. Life insurance or an annuity contract may provide for an ever-increasing death benefit to account for inflation. Morticians usually sell such insurance and expect to be named the beneficiary. Other insurance plans advertised as "preneed plans" are not tied to specific funeral goods and services. They are simply life insurance, and you may choose the beneficiary you want to control the use of the funds.

Advantages of Prepaying

By paying in advance you may:

Ensure that money is available for your funeral service.*
Provide peace of mind if you have no others to make final arrangements.
Set funds apart from other assets if you apply for certain social benefits.

Shop Around

Comparison shopping is important when choosing funeral arrangements. The costs of such items as caskets or "professional services" vary dramatically from mortuary to mortuary. Compare prices from at least three mortuaries. You are entitled by law to be provided with a detailed price list or given prices over the phone. If you are not sure what is included in "professional services", be sure to ask.

Watch out for Pitfalls

Disadvantages of paying in advance:

Remember that states generally regulate prepaid funeral expenses differently from prepaid cemetery expenses. Regulations on preneed cemetery purchases are usually much looser and offer the consumer far less protection.
In many states, should you move, you cannot shift your arrangements to a new location or receive a refund unless you leave the state.
Money paid today may not cover inflated future funeral costs, resulting in possible substitution of less expensive merchandise or additional funding from survivors (just what you tried to avoid).
Money you pay today for funeral arrangements may be needed for other, emergency purposes.
If payment is made in installments and you do not complete the payments, your refund may be reduced by a sales charge which could be as high as 30%.
If your state does not require funeral directors to provide you a 100 percent refund of your money if you decide to cancel your prepaid funeral, you may get back much less back than you paid in.
The seller of today's funeral services may not be in business at the time of your death. If death occurs prior to the time you complete payments, your agreement may not be honored in full.
In many states part or all of the interest earned on your account may be withdrawn each year by the seller as part of his administrative fees.
Your survivors may not be aware you have prepaid your funeral.

Significant Considerations

Important factors to consider before you purchase a paid plan:

Your plan should allow for a full refund with little or no penalty.
Your money should be safe. A Totten Trust is a regulated trust governed by state laws.
and if the states are taking proper control, your money is probably safe. Funeral insurance plans are not as tightly governed, so extra caution should be taken.
Your plan should be transferable if you move.
Obtain a guaranteed agreement in which the funeral director agrees that the original price, plus interest, will pay for the designated funeral.
Make sure leftover funds will be paid to your estate. Otherwise, the mortician will probably keep them.

We heartily endorse the idea of planning your funeral in advance. Comparison shopping for prices and services is important for any large purchase, and funerals are no exception. However, be very cautious if you pay for your funeral in advance. Maintain control over your funds to assure they will finance your funeral when the time comes, and to confirm your money is protected. These are considerations of paramount importance. Your local memorial society can assist you in research, but the final decision is yours.

Another excellent resource on preneed is available fromthe American Association of Retired Persons. Send a postcard request for Prepaying Your Funeral?, Vol. 2, No. 2, to: AARP Fulfillment 601 -E- Street NW Washington, DC 20049.

*This depends on how strong your state's trusting requirements are, the type of contract you've paid for, and many other factors.

Last Updated ( Thursday, 06 December 2007 19:51 )

Comments (8)

Medicaid will allow you to prepay for a funeral - the insurance policies can be assigned for this purpose - up to a certain amount. You should contact them directly to ask how to do this, and how much you're able to spend in your state.

My mother is in a nursing home for short term rehab. It is looking as though she will not recover short term and may have to go to long term care. We are in the process of preplanning her funeral and want to be certain it is paid for because if she goes long term, she will have to use up all her funds and the value in her home to the nursing home prior to going on MEdicaid. We have been told that should she be on Medicaid at the time of her death, the life insurance policies will have to be signed over to Medicaid. We feel they should be able to be used for her burial. How do we preplan and still be able to use her life insurance toward the cost?

Hi Angie,

I'm sorry to hear about this situation. You could try calling the California Funeral and Cemetery Bureau. I'm not sure if CA does, but some states colllect a copy of each prepaid contract sold. They're at 916-574-7870. Barring that, you'd just have to start calling funeral homes you think are likely the ones mom might have done business with. You should also be prepared for the possibility that no such prepaid plan ever existed - sometimes folks get mixed up, or there's a miscommunication. Our site will help you get the most for your money if you end up having to pay for disposition.

Good luck,

Josh Slocum, Exec. Director

My mother was financially preyed upon by a young man and subsequently the County stepped in and became her conservator for a period of a few months until I could petition the courts to become her conservator. My mother has dementia and is 93 years old. The County sold her home and destroyed all of the contents. My mother had talked about having funded a pre-paid funeral but I have no information as to who she may have done this through. Is there any way I can find out who she may have had contracted with for these services? It should be somewhere in Southern California but that is a large area.

Mr. Owens:

You are confusing preplanning with prepaying. FCA heartily endorses planning ahead and educating your survivors so that ignorance of their options does not compound their grief when death occurs. This entire site is dedicated to that, and it's hard to understand how you could miss that.

Prepaying is a different matter altogether. Those who prepay don't know their money isn't usually well-protected against fraud. Hundreds of millions of dollars in consumers' prepaid money has gone missing in the past year alone.

In addition, those who prepay usually fail to educate their survivors on what they bought, how to make changes if necessary, whether to expect to have to pay more or not, and myriad other necessary details. Paying ahead does not lift a burden from survivors if it comes at the cost of leaving them ignorant of the contract details, and unable to know what to do if Dad dies out of the service area of the funeral home, just to name one example.

The best approach, in our experience, is to have a candid family discussion well in advance of death. Shop around, and make sure your survivors understand their legal rights, what your wishes are, and how to find an affordable funeral that meets the family's needs. One can always put money aside in an account for this purpose without locking it up with a funeral home.

No matter how badly we'd like it to be true, there's no such thing as "taking care of everything" and "removing all the burden" from survivors. We do them a disservice when we pretend this is so, because we leave them ignorant and unable to help themselves when they are faced with decisions (and they will be) at the time of death.

Josh Slocum
Executive Director

In your advantages of pre-arranging, nothing is said about the tremendous burden this takes off the survivors, who will be grieving, usually not thinking clearly and very vulnerable to a funeral director whos main goal is to get as much of their money as he can.

Hi Michele,

Thanks for leaving a comment. Please note there is no master price list for FCA. *Some* of our local volunteer chapters have agreements with funeral homes in their area to give members discounted prices, but not all of them. If you're a member of a local FCA that offers these discounted prices, please contact that group directly. You can find them at the button at the top of this menu that says "Find a Local FCA."

But even if you're not in the service area of a local FCA that has found funeral homes that offer members a discount, we still have lots of free literature that will help you get the best price on a cremation or burial when you shop on your own. Please click on our "Frequently Asked Questions" button on the left-hand menu.

Thanks for writing,

Josh

on what webpage will I find the FCA price lists, plz?

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