How Pre-Paid Funeral Plans Work
Funerals are a topic we just tend to avoid, and planning for one can seem downright uncomfortable. It might feel like we are dwelling on the negative. But in fact, it can be a very loving choice. Taking care of funeral arrangements and expenses ahead of time can be a real gift to those who will be grieving when you pass away. And it can save your family hundreds, sometimes even thousands, of dollars along the way.
The National Funeral Directors Association says the median price of a funeral is now $8,508; the median cost of a viewing and cremation is $6,078; caskets alone can range from $2,000-$10,000. Neither the funeral nor the cremation estimates include expenses for things like cemetery markers, obituaries, or flowers, which means the total cost can easily approach $9,000-$10,000.
Setting aside money to take care of any large expected expense is a smart thing to do, and a funeral is no different. The key is to understand how pre-paid funeral plans work.
What is a pre-paid funeral?
A pre-paid funeral is just what it sounds like – a set of funeral arrangements, as detailed as you desire, that have been paid for ahead of time (meaning either the money has already been paid or has been set aside for this purpose). There are different ways to do this, depending on your preferences and financial concerns:
Designating a joint bank account
When a person dies, his or her assets can be temporarily unavailable – even to a family member – until the estate is settled. Setting up a joint account solves this problem, because the survivor on the account has access to the funds. This option is useful only if there is enough money in the account to pay for funeral expenses, so if the discipline of continually making deposits and leaving the balance alone seems difficult to you, another option might be better.
Setting up a payable on death bank account
Also called Totten Trusts (the name comes from a 1904 New York court decision), a Payable on Death (POD) account is set up through your bank. With this type of account, you name a beneficiary, and the funds are available to that person when you die. Until that time, however, you are free to add or withdraw money, move or close the account, or change the beneficiary. A POD account avoids probate.
Using an existing life insurance policy
If you have a life insurance policy – either term or whole life insurance – it is probable that the death benefit will be enough to cover the funeral expenses. (Be sure that the beneficiaries know that this is what is intended.) However, term insurance could expire before a person dies, and some people choose not to renew, meaning there will be no death benefit.
An insurance policy or trust set up through a funeral
In this case, you buy a “pre-need insurance plan” through a specific funeral home, purchasing it either with a lump sum or payments over time. In some ways, this seems streamlined and simple. However, there are questions to ask to avoid situations in which you could lose money:
- Are the payments themselves reasonable?
- How long does the policy take to pay off? What happens if the person dies before the policy has been paid off?
- What happens if the funeral home should close or change ownership?
- What are the consumer protections in your state?
- What exactly does the money you pay cover?
- What happens if you move away?
- What happens if funeral costs rise before you die?
- What happens to the interest that’s earned on the payments you make?
- Can you cancel the contract and have your money refunded if you change your mind?
- If there is money left after the funeral, who gets it?
A savings account or trust set up with the funeral home as the beneficiary
In this instance, a bank account or trust is set up ahead of time, making the funeral home the beneficiary. Unlike purchasing a policy through the funeral home, the funds are in your control until you die.
Purchasing a final expense insurance policy
This kind of life insurance policy, also called burial insurance or funeral insurance, is purchased from an insurance company and is meant to cover not only funeral expenses but also any last medical expenses or other costs incurred near the end of life. Purchasing one usually requires answering health questions on an application. Typically, they are plans with a death benefit ranging between $10,000-$25,000.
No matter what option you choose, family communication is critical
A person may plan and pre-pay for their own funeral, but fail to inform family members. Sometimes the details are in the person’s will, but the will is often not read until after funeral services. Similarly, a person might keep an insurance policy or trust in a safe deposit box, but grieving family members may not go through that box right away.
Either circumstance means that despite your attempt to help your loved ones get through a tough time, they will be making arrangements and paying for them without knowledge of your planning. Regardless of how you choose to pre-pay for a funeral, be sure your family members know what arrangements have been made and have copies of important papers.
How Funeral Advantage™ can help
Lincoln Heritage Life Insurance Company’s Funeral Advantage program includes both a life insurance cash benefit and access to family support through the Funeral Consumer Guardian Society (FCGS). The policy requires no medical exam, just a set of health questions. As part of the program, you fill out a two-page Funeral Plan form and return it to the FCGS. Upon your passing, the FCGS will notify the funeral home and provide the home – as well as a family member or friend – with Funeral Plan.