Today, the average cost of a funeral can easily approach $10,000 or more. By the time you’re ready to exit this world, that amount could be considerably more. In fact, funeral expenses have outpaced inflation since the mid-1980s. If that amount concerns you now, you may be looking into the purchase of either a pre-need plan or final expense insurance.
Simply put, a pre-need plan is one that is purchased from a particular funeral home, You select the funeral home that you wish to provide services, specify the arrangements and pay any associated costs in advance (either with one lump sum or by making payments).
Final expense insurance (also called “burial insurance” or “funeral insurance”), on the other hand, is purchased from a life insurance company. With death benefits paid to a beneficiary ranging from approximately $10,000 to $25,000, the proceeds can be used to pay for anything—from your funeral costs to unpaid medical expenses, probate fees or outstanding debts. It could even be used to fund a family trip to Europe or some other destination to scatter your ashes.
The question is, are either of them right for you?
Is a pre-paid plan worth the money?
A 1998 AARP survey indicated that some 32% of all Americans over age 50 or roughly 21 million people, had prepaid for some or all of their funeral and/or burial expenses. You would think with those numbers that this means it’s a good idea. There are certainly a number of advantages advertised to purchasing a pre-need plan. However, there are substantial disadvantages, as well.
A Pre-Paid Plan:
- Allows for inflation in future costs (for those contracts that do not guarantee prices) by investing money in an interest-bearing account or buying life insurance that increases in value over time.
- Allows you to determine in advance the funeral products, funeral services, burial products and burial services that you would prefer.
- Prevents family members from having to make decisions when they are most vulnerable to manipulation.
- Can lock in guaranteed prices (available with some contracts) forever.
- Guarantees (for many contracts) that if products and services currently purchased are not available in the future, equivalent substitutes will be provided at no additional cost.
- Helps the family to avoid taking out loans, arranging finance plans, raiding savings or selling assets to pay for a funeral and burial.
- May allow for transfer to another funeral home or for a partial or full refund.
- Provides peace of mind knowing these arrangements have been made in advance.
- You can use a prepaid funeral contract to spend down assets for Medicaid while still having a burial plan in place.
On the other hand:
- Providers may fail to provide an itemized list of services and goods allowing them to leave out services and goods or substitute less expensive items that were originally believed to be included in the agreement.
- There may be no transfer option if you move to another state.
- If products or services that were originally purchased initially are no longer available in the future, the family might be forced to pay for something more expensive.
- The provider may go out of business, leaving no recourse to get the money back.
- Growth in the death benefit over time on insurance funded contracts may mean the funeral home is pocketing interest instead of refunding it or crediting it to the account.
- There may be a waiting period on some insurance funded plans in which few or no benefits are paid at death if you die “too soon.”
- There may be no refund allowed if you want to cancel the plan in the future.
As pre-paid plans are not regulated by the federal government and have proven to be problematic, the FTC recommends that you ask these questions if you’re considering a purchase:
- What exactly am I paying for?
- Am I buying only merchandise, like a casket and vault, or am I purchasing funeral services as well?
- What happens to the money I pay you? Different states have different requirements for handling funds paid in advance for funeral services.
- What happens to the interest income on money I pay?
- How am I protected if you go out of business?
- Can I cancel the contract and get a full refund?
- What happens if I move or die while away from home?
Let the Buyer Beware
If you do decide to purchase such a plan, be sure to tell your family about it and let them know where your documents are filed. If they aren’t aware of your plans, your wishes may not be carried out. What’s worse, they could end up paying for the arrangements again—as at least one family learned the hard way. In fact, you may wish to consult an attorney on the best way to ensure that your wishes are followed.
While millions of people have purchased these plans, ElderLaw Answers urges caution by noting that, “. . . consumers lose millions of dollars every year when pre-need funeral funds are misspent or misappropriated. A funeral provider could mishandle, mismanage or embezzle the funds. Some go out of business before the need for the pre-paid funeral arises. Others sell policies that are virtually worthless.”
AARP also warns that, “Josh Slocum, executive director of the Funeral Consumers Alliance and co-author of Final Rights: Reclaiming the American Way of Death, doesn’t recommend purchasing a prepaid funeral plan: Some prepaid plans can actually cost you more in payments over time than the amount they’ll pay out on your funeral,” he says. Instead, set up a ‘payable upon death’ bank account. It will earn interest, be available for an emergency, and still provide financial support to your family when you pass away.”
Are Final Expense Plans Any Better?
Unlike pre-paid funeral plans, final expense plans don’t provide any assistance with selecting funeral products and services or handling the funeral arrangements. In general, they only provide a pre-determined death benefit to your beneficiary. It’s that simple.
The exact cost of a final expense plan will depend on your age, not your health. And, unfortunately, the older you are, the larger the premiums. As final expense insurance can be purchased as either a term or whole life policy, it can last for the duration of a term or until the whole life policy ends at age 100.
- As a final expense plan is not dependent on any one particular funeral home or chain, there’s no worry about whether they may be sold or go out of business.
- You have the freedom to price shop the core services as well as any funeral items offered by the home such as headstones and caskets.
- You won’t be required to take a medical exam to receive coverage, and your policy can’t be canceled due to changes in health.
- Additional benefits can be awarded in the case of accidental death.
- As an insurance product, its sale is regulated by the federal government.
- Your beneficiary can use the benefits for the expenses such as medical bills, probate or legal fees.
- Final expense insurance leaves your options open, a great benefit given the length of time that may pass between choosing and using a policy.
- Your premium’s amount will not go up as you age.
- This type of policy can increase in value over time.
- You can borrow against the tax-deferred dividend value of your final expense policy, which means you’ll also have an accessible line of credit in case of emergency.
- Policy payments can be paid monthly or yearly.
- Final expense insurance is available to those in poor health with graded benefits, meaning only a portion of your policy will be available for the first few years of coverage.
- Compared to a life insurance policy, final expense insurance offers relatively low coverage.
- For the amount of coverage you can get, traditional life insurance is a better value and provides a financial return that isn’t available with final expense insurance.
- The beneficiary isn’t technically (or legally) required to use the proceeds to pay for funeral expenses. They can use the death benefit for whatever they wish.
Are there any other options?
In a word, yes. If you like the idea of making your wishes known (without risking the purchase of a pre-paid plan) but also like the idea of a defined payment through the final expense plan, you can have the best of both worlds.
Simply start by completing an advance directive clearly stating your preferences and combine that with either:
- The purchase of a final expense plan
- The purchase of a life insurance policy or
- A self-funded “payable upon death” savings account
Your estate will know exactly what you want and will also have the funds to pay for it.
Should you have a particular funeral home in mind, you may also want to inquire with them in advance to ensure they will accept an assignment of the insurance policy payout.
This means that any proceeds will go directly to the funeral home to cover the cost of any products or services you may have pre-arranged (The beneficiary will receive any money over the cost of the funeral.).
Don’t automatically assume that this will occur. Some funeral homes require payment upfront and won’t wait until the final expense insurance policy pays out.
As you navigate your journey along the gray mile, you can pre-plan your final rest stop. However, just like any trip, there are different ways to get there. Make sure you look into all the avenues and their final costs.