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What Are Prepaid Funeral Plans & How Do They Work?

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Two topics most people would rather avoid are finances and death. But as they say, there are only two certainties in life - taxes and death. 

Pre-paid or pre-need funeral plans can give you and your family peace of mind at the end of life. Pre-paying for funeral arrangements seems to make the most sense seeing as the cost of a funeral only goes up over time. 

Still, many families wait until their loved one dies before they scramble to make funeral arrangements and end up paying current-day lump sum costs for burial or cremation services. It is far better to have all legal documents in place as a caregiver before needing them.

When a loved one dies, the experience can be traumatic and stressful. The grief and sadness can be overwhelming, and the after-death tasks overwhelming. Settling the estate, gathering the death certificate, accessing the bank accounts, and informing family members of the death are just a few of the responsibilities. 

Making funeral arrangements in advance and having a prepaid plan gives the family less to worry about and respects and supports your loved one’s final wishes

 

Different Types of Pre-Paid Funeral Plans

The cost of a funeral continues to rise, with the average in 2022 between $7000-$9000. But costs can soar over $20,000 depending on the plan. 

There are several types of pre-paid funeral plans. For those individuals who choose cremation with no service or burial, the process is simple. 

Most cremation companies allow you to register online and pay at the time of body collection and authorization of cremation. Many cremations are less than $1000 and are growing in popularity. 

Let’s look at the financial payment options for prepaid funeral plans.

 

1. Pre-Pay in Full

One option is pre-paying for the total cost of your loved one’s funeral and burial costs in advance. By prepaying your funeral in full, you choose the funeral home you want to carry out all of your services. 

You can determine every aspect of funeral expenses and should have no other costs for the family to pay unless they change parts of the service after your death. You can transfer your loved one’s plan to another funeral home if they change while they are still alive.

2. Totten Trust

A Totten trust is where one party places money in a bank account with instructions that upon the person’s death, whatever is in that account will pass to a named beneficiary. 

This payable upon death account or POD account can accrue interest depending on the account type. The money can then be used to pay for funeral services.

3. Revocable or Irrevocable Trusts

A revocable trust or irrevocable trust protects the grantor’s assets and avoids probate after death. Probate is a court proceeding that distributes assets of the will to beneficiaries. With a trust, once the grantor dies, the assets go to the beneficiaries or trustees.

Purchasing an irrevocable funeral trust can also allow an applicant to pay in advance for a funeral plan, reducing countable assets and eligibility for Medicaid to go into a nursing home.  

An irrevocable funeral trust is not counted as an asset by Medicaid.

4. Life Insurance or Burial Insurance Policy

Many life insurance policies will provide a payout to the beneficiary of a lump sum payable upon death. The death benefit will pay for your survivors' funeral or any other general financial needs. 

With this plan, the amount is payable upon death and doesn’t have to go through probate. 

There’s also burial insurance, which is a policy that pays death-related costs, and pre-need insurance. Burial insurance is a whole life insurance policy sold in small amounts, such as $5,000 to $25,000. These policies are meant to pay final expenses and funeral costs.

 

How To Choose A Pre-Paid Funeral Plan

Choosing a pre-paid funeral plan, also known as a preneed plan, should be part of your loved one’s final arrangements for their estate plan. Cost, family dynamics, your loved one’s wishes, and personal preference all factor into the decision. 

Having the funds set aside is one thing, but the actual plan is another. Your loved one can set the money aside without choosing a funeral home or plan yet - ask your loved one for specifics on what they would like after they die. 

Some questions to ask the funeral director before deciding to pre-pay with a specific funeral home:

 

  • Does my loved one have the option of paying for their funeral plan in installments, and what are the premiums?
  • Can I or my loved one cancel the contract?
  • Does my loved one have the option of transferring my plan to another funeral home?
  • If I or my loved one cancel the contract, how much of the money will be refunded?
  • Can the contract be transferred to another funeral home?
  • What happens if the services and items chosen are not available at the time of my loved one’s death?
  • Is the money prepaid for my loved one’s funeral kept in a trust? And if so, how much of it is?
  • What happens when my loved one dies out of state or in another county or city?
  • What happens if the casket or other services are not available at the time of my loved one’s death?
  • What happens if you go out of business?
  • What precisely is included in the prepaid plan? Most plans will cover the casket, flowers, transportation, funeral services, cemetery and headstone, and cremation if requested. 

Potential Problems with Pre-Paid Funeral Plans

Although pre-paid funeral plans provide peace of mind for family members, there are potential risks and problems:

  • Don’t transfer: Not all plans transfer to a different funeral home, meaning your loved one will only be able to use one funeral home. If your loved one changes locations or moves, they could be out of luck
  • Out of business: If the funeral home goes out of business, there may not be any financial recours

  • Not all expenses may be covered: Aside from your loved one’s funeral and final resting place, there could be other fees your family might be stuck with.
  • Lack of Flexibility: These plans don’t have a lot of flexibility. Once your loved one dies, your family may not be able to make changes. 
  • Protection: Most states don’t offer much protection for those who pre-pay for funerals. 

Prepaid Funeral Plans 

Prepaid funeral arrangements can work if you and your loved one understand all of your options for either paying upfront or setting money aside. 

The important part is knowing what type of funeral you want, cremation versus earth burial, and any other significant aspects of services that your loved one wants. 

Rather than telling family members your desires, write them down, so everyone is clear about this important ritual at the end of life.

Amanda Lambert

Amanda Lambert is a Certified Care Manager, Aging Life Care Professional, and Certified Master Guardian Emeritus. She is also the founder of Lambert Care Management, providing care management and consultation services to older and disabled adults. She has 20+ years of experience in geriatrics, with expertise in mental health, home health, and guardianship, as well as all aspects of care planning, including assessment, projected costs of care, client advocacy and education, caregiver coaching, and advance directives. She is also co-author with Leslie Eckford of Choose Your Place: Rethinking Home as You Age (2020), Aging with Care: Your Guide to Hiring and Managing Caregivers at Home (Rowman and Littlefield 2018).

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