It’s a good idea to save aside money for any significant anticipated expenditure, and a funeral is no exception. Understanding how pre-paid funeral arrangements function is crucial.
Pre-planning funerals is becoming increasingly popular since it relieves loved ones of the stress of having to do so during such a difficult time. You may also save money by making your own arrangements because you can pick the sort of service you desire.
However, not all pre-paid funeral arrangements are financially sound. Let’s look at what works, what doesn’t, and what questions you should ask to make sure you get the best strategy possible.
Prepaid Funeral Plans – What Are They?
A pre-paid funeral is a funeral arrangement established with a funeral home and paid in advance (the money has already been paid or has been set aside for this purpose). Depending on your tastes and budgetary considerations, there are several options. The plans generally vary in price from $10,000 to $25,000 and are paid in monthly payments to the funeral home.
Pre-paid funeral plans allow customers to pay for their funeral arrangements in advance of their death. It’s for those who don’t want their mourning loved ones to have to make decisions or deal with the financial burdens. However, other experts believe that when fees and other expenses are included, these sorts of arrangements may end up costing you more than a typical funeral.
Costs and Expenses of a Prepaid Funeral Plan
The majority of pre-paid insurance plans cost between $10,000 and $25,000. When purchasing one, you have the option of paying the whole money upfront or setting up a three, five, or ten-year payment plan. You should anticipate paying certain additional expenses in addition to the funeral costs. For example, you may have to spend $100 to $200 in administrative setup expenses. In addition, some plans have yearly and continuing maintenance costs ranging from $50 to $150.
Are Funeral Expenses Paid in Advance Tax Deductible?
“Are funeral expenditures tax-deductible?” many people worry. ” It’s an excellent question. While most funeral expenses are not tax-deductible for individuals, when the estate pays for the burial charges, the laws alter. According to the IRS, if the estate pays the funeral costs, such as when utilizing a pre-paid plan, the estate can deduct the expenditures from its taxes. Before thinking something is tax-deductible, always consult a tax specialist.
Should You Pay for Funeral Expenses in Advance?
Although acquiring a prepaid funeral plan from a funeral home may appear to be a humane and prudent decision, the fact is that there are more cost-effective alternatives to pay for your burial expenses. Most experts feel that pre-paying your funeral and engaging directly with a funeral parlor has far too many hazards.
In reality, because these programs lack a lot of regulatory control, state and federal authorities have examined funeral homes and pre-payment providers and uncovered significant breaches of trust. If a funeral home is not respectable, your payments may be misappropriated or embezzled. Some even go out of business before a pre-paid funeral is required. Others promote policies that are almost useless. The Funeral Rule, enacted by the federal government in 1984, provides some consumer protection, but state laws differ, and some jurisdictions give less protection than others.
Taking up a small last expenditure life insurance policy is an option to pre-pay for your funeral expenses. These policies are more flexible than pre-paid funeral plans and are heavily regulated by multiple state and federal agencies.
What Are the Typical Expenses Covered by a Prepaid Funeral Plan?
A prepaid funeral plan is tailored to your specific needs and wants for your funeral. You can, for example, include funeral home services, a casket, flowers, transportation, and anything else you need.
The funeral home director will arrive at a price once you’ve produced a list of everything you wish to include in the policy, and it will be the foundation for your coverage.
When purchasing a prepaid funeral plan, you have the option of purchasing a guaranteed plan that specifies the specific products and services you desire, and the price you agree to is guaranteed. That means your loved ones will not have to pay extra if prices rise. This is not a feature of non-guaranteed programs. That means if you buy a $3,000 coffin and the least costly caskets are $6,000 by the time you pass away, your loved ones will be responsible for the additional $3,000.
How to Make a Prepayment
You have the option of working directly with the funeral home or through a prepaid contract provider when paying for a prepaid funeral plan. These companies deal with a number of funeral houses to coordinate payments for funeral plans. You’ll set up a payment plan with the funeral home or supplier after you’ve decided on the items and services you desire.
The Benefits and Drawbacks of Prepaid Funeral Plans
When considering acquiring a pre-paid funeral plan, consider the following benefits and drawbacks:
|Take care of the logistics of your funeral so that your loved ones don’t have to when you’re gone, and you’ll have peace of mind.||Despite your efforts, the funeral home might go out of business, leaving your loved ones to foot the bill. Check with your funeral home to find out how they handle things.|
|You have complete control over the sort of funeral you desire and the cemetery plot you wish to be buried in.||Most prepaid funeral plans do not transfer – if you have a contract with one funeral home and die in a different area or wish to relocate, the funeral house will likely refuse to transfer your plan to the new funeral facility.|
|You can lock in today’s costs with a guaranteed plan, even if prices rise.||If you change your mind about the plan or opt to pay for your final expenditures in a different way, you may not be eligible for a refund.|
|Some folks are keen about hiring a specific funeral home. Purchasing a prepaid funeral home assures that their ultimate desires will be carried out.||Prepaying for your funeral leaves little money for your family to pay for other end-of-life obligations, such as medical bills.|
Funeral Insurance or Final Expense Insurance Policies
A funeral insurance policy, often known as last expenditure insurance or burial insurance, is one option to pay for your funeral expenses in advance. You can name a beneficiary to receive the death benefit when purchasing life insurance plans, such as a family member, a friend, or anybody else you trust. Life insurance funds, unlike prepaid funeral plans, can be utilized for a number of purposes, including funeral expenditures. However, the beneficiary can use them for things like medical bills, credit card debt, and any energy bills that come up throughout the month.
You can name a funeral home as a beneficiary in several states. If a funeral home is your beneficiary, your family must trust that the death benefit will be handled honestly and with integrity. Keep in mind that naming a funeral home as your beneficiary may result in no monies remaining for your family.
Costs of a Funeral on Average
A poll was undertaken by the National Funeral Directors Association (NFDA) to determine the median cost of a funeral. Without a vault, the median cost in 2021 was $7,848; adding a vault boosted the cost to $9,420. The burial site, monument, flowers, and obituary are not included.
According to the NFDA, the following is the funeral cost checklist included in the median funeral expenditures in 2021:
|Funeral home’s basic service fee (non-declinable)||$2300|
|Transporting remains to funeral home||$350|
|Preparing the body in other ways, such as makeup and hairstyling||$275|
|Facilities and staff to manage a viewing||$450|
|Facilities and staff to manage a funeral ceremony||$515|
|Basic memorial printed package||$183|
|Median cost of funeral with viewing and burial||$7,848|
|Cost with Vault||$9,420|
Funeral Insurance vs. Prepaid Funeral Plans
Although it’s common to confuse a pre-paid funeral plan with a funeral insurance policy, they’re not the same thing. A pre-paid policy is paid to the funeral parlor where the contract was signed. The only one who has access to the funds is the funeral home. Your family may have to pay additional charges depending on whether the plan is guaranteed or not.
A funeral insurance coverage, on the other hand, gives you additional options. You can choose any beneficiary, and they can use the money to pay for your burial, medical costs, last utility bills, and other unpaid liabilities. And if there is any money left over, your recipient is free to do anything they want with it.
|Funeral Insurance||Prepaid Funeral Plan|
|Extremely flexible — may be utilized in every location on the planet.||Extremely limited – generally only used at the funeral home from whom it was purchased.|
|Additional benefits are often provided as insurance riders.||Additional advantages are rarely provided.|
|Money is sent straight to the recipient.||The money is given to the funeral home immediately.|
|Families may compare funeral costs to find the best bargain.||The funeral home sets the prices, and there is no way to compare them.|
|The benefits of a policy might be shared across several people or groups.||The funeral home is the only beneficiary of the policy.|
|Typically accumulates financial value that may be withdrawn as a policy loan.||Cash value may or may not be built.|
Trust for Prepaid Funerals
If you want to engage with the funeral home directly, they may be able to offer you a trust-based pre-payment plan in which your contributions are placed into an interest-bearing account. The money grows in value until you die, at which point your heirs can use it to pay for your funeral.
However, depending on your state, the funeral home may only be obligated to deposit up to 60% of the funds into the account. Furthermore, they are authorized to take 10% or more for administrative costs, and if you miss payments, they can lock the trust and use the money to pay their expenses. What happens if you want to pay out the trust? In some areas, the funeral home is allowed to retain up to 30% of your funds.
Trusts: Irrevocable vs. Revocable
You have the option of creating an irrevocable trust or a revocable trust when signing a contract with a funeral home. When you sign an irrevocable trust, you are agreeing to a contract that cannot be modified. In other words, you won’t be able to request a refund if you change your mind. You must sign an irrevocable trust to qualify for a Medicaid exclusion.
If you sign a revocable trust, on the other hand, you have the option to change your mind and obtain a return.
Before you pay in advance, think about these questions.
Ask yourself the following questions before purchasing a prepaid plan.
- Are the payments reasonable in and of themselves?
- How long does it take for the coverage to pay off? What happens if the policyholder passes away before the policy is paid off?
- What happens if the funeral home goes out of business or changes hands?
- What are your state’s consumer protection laws?
- What does the money you pay go towards?
- What happens if you decide to relocate?
- What happens if the cost of your funeral rises before you pass away?
- What happens to the interest you earn on your payments?
- If you change your mind, can you cancel the contract and get your money back?
- Who receives the money if there is any leftover after the funeral?
Medicaid & Prepaid Funerals
When you purchase a pre-paid funeral plan, it is not included in your Medicaid spend-down. That is, it will not affect your eligibility for Medicaid. However, keep in mind that the amount you may invest in a funeral trust in many states is limited to $5,000 to $15,000.
Prepaid Funeral Services and Arrangements
Prepaid funeral insurance policies are not all the same, and you may customize yours to cover whatever you desire. However, take in mind that what you add has an impact on the policy’s cost. The majority of pre-made blueprints include:
- Funeral home expenses
- The death certificate
- Clergy expenses
- The cost of the burial
The casket, headstone, and burial site are not always included in prepaid funeral home arrangements. Keep in mind that, in most cases, working directly with a funeral home allows you to tailor your plan.
Creating a Joint Savings Account
When someone dies, their assets may be temporarily unavailable to anybody – even family members – until the estate is settled. Setting up a joint account eliminates this issue because the account’s survivor gets immediate access to the funds. This method is only viable if there are sufficient funds in the account to cover funeral costs. If you find it difficult to keep making deposits and leave the balance alone, another solution may be preferable.
Creating a Payable-on-Death (Payable-on-Death) Account
A Payable on Death (POD) account, often known as Totten Trusts (after a 1904 New York court case), is set up through your bank. After you choose a beneficiary for this sort of account, the money is made accessible to that individual when you pass away. You can still add or withdraw money, move or terminate the account, and alter the beneficiary until then. Probate is avoided with a POD account.
Taking Advantage of an Existing Life Insurance Policy
If you have a life insurance policy, whether term or whole life, the death benefit is likely to be sufficient to cover your funeral expenditures. (It’s critical to inform the beneficiaries that you want to use some of the money to pay for your funeral.)
Term insurance, on the other hand, may expire before a person dies, and some individuals opt not to renew, resulting in no death payout. Find out more about whole life insurance and how it works.
Buying a Final Expense Insurance Policy
This type of life insurance, sometimes known as burial or funeral insurance, is obtained from an insurance company and covers not just funeral costs but also any past medical bills or other charges spent at the end of life. Answering a few health questions on an application is normally required when purchasing this sort of coverage. A death benefit ranging from $10,000 to $25,000 is usually included in these policies.
Family communication is critical regardless of the option you choose.
A person may devote a great deal of time and effort to preparing their pre-paid funeral arrangements, yet neglect to finish the most crucial step: telling their loved members. They may include the information in their will, but family members rarely read it until after the burial. Similarly, an insurance policy or trust may be kept in a safe deposit box, but mourning family members may not look through it soon away.
In any case, despite your best efforts to assist your loved ones in getting through a difficult period, they will make plans and pay for them without realizing you’ve already taken care of the specifics. Regardless of how you choose to pay for a funeral in advance, make sure your family members are aware of the plans and have copies of any relevant documents.