Prepaid Funerals — Do They Make Sense?

Posted: April 24, 2015 in Personal Finance
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Funerals have become big business and corporate managers are working hard to squeeze out every last dollar. One of the most profitable and apparently compassionate products they’ve developed is the “pre-need” funeral package – basically, the prepaid funeral.

Industry-wide abuse and government regulation

Salespeople tout these plans as wonderfully beneficial, but there’s no shortage of horror stories. The families of deceased purchasers of prepaid funerals would be surprised by invoices for items not covered by the preneed contract – things like the services of a funeral director, a substitute casket, or even the cost of opening and closing the grave itself and actually burying the remains.

Many states responded with more or less consumer-friendly legislation, and today there’s a much higher degree of regulation over the industry. In some states, for instance, funds used for prepaid funerals must be placed into a trust under the consumer’s control. Many states also require funeral directors to advise purchasers of all the services and equipment their prepaid funeral contract will not cover.

The Mechanics of Prepayment

When a prepaid plan is selected, there are different ways to effect the payment. The first is a lump sum payment, which is not very common. The second is installment payments into a trust fund, which today is controlled by the purchaser in most states, but sometimes controlled by the funeral director. A third approach is the purchase of a whole-life insurance policy, which names the funeral director as the owner and beneficiary.

Why Preplanning Makes Sense, But Prepayment Doesn’t

There are some good reasons to avoid prepaying for a funeral, though, and the first is obvious – while it makes sense to preplan a funeral, it doesn’t usually make sense to prepay it. A funeral can preplanned with a funeral director and reviewed with a trusted loved one to whom you entrust the responsibility of carrying out your wishes.   Funeral plans can even be incorporated into a will.

Pre-funding a funeral can be arranged without involving the funeral home, though. This can be done by means of a simple trust fund established for burial purposes, or a simple term life insurance policy which names a trusted loved one as beneficiary. This will give the consumer and loved ones a great deal more flexibility in case of relocation or even simply changing one’s mind about funeral details.

Relocation and changing one’s mind, in fact, are two major reasons to think twice before prepaying a funeral. Americans move frequently. On average, about 15% of the American population moves in any given year, and a third of them are above age 50. That means that in any five-year period, as much as a quarter of all Americans over age 50 might move. The overwhelming majority of preneed funeral contracts aren’t transferable, though, and the refund policies generally favor the funeral homes, with some contracts refunding only 50%.

Likewise, people change, and so do their needs and plans. What may seem like an appropriate funeral plan when drawn up at age 50 may not make sense when reviewed at age 75, yet many preneed funeral contracts don’t permit any changes without significant penalties, or loss of certain protections like inflation protection. Moreover, if a purchaser decides on a cremation instead of a burial, the chances of getting a refund of the price differential are slim.

The Sales Pitch

As to the reasons given by the funeral industry:

  •  Don’t burden the family and loved ones with the task of planning a funeral during such a stress-filled period.

Preplanning a funeral makes sense, but there’s no need to pre-pay the funeral home, especially if prefunding arrangements are made within the family.

  • Why should the financial burden of a funeral be imposed on the family if the client can afford it now?

Why indeed? Nevertheless, prefunding a funeral without releasing control of funds to a funeral director for an event which may not take place for decades gives the family more flexibility and controlled.

  • The purchaser of a preneed funeral contract can lock in today’s prices and avoid the withering effects of inflation.

Although funeral costs have risen faster than the rate of inflation, both have been fairly moderate over the past few years. In addition, private prefunding of a funeral’s costs, if done in a financially prudent manner, will generally provide a greater return on the purchaser’s investment, and thus protection against inflation, than the standard installment plan sponsored by many funeral directors. Finally, in the event of relocation or a change of plans, most preneed contracts contain cancellation clauses that favor the funeral director to the detriment of the consumer.

While the financial aspects of preneed funeral contracts are under much closer official scrutiny today than when they were initiated, the question of the wisdom of pre-paying for a funeral hasn’t received much attention. The fact is, though, that there are prudent, meaningful alternatives to a prepaid funeral. There are circumstances in which a prepaid funeral is justified, such as when an individual is in the process of a Medicaid spend-down, but many more in which it’s not.

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