It is smart to save money for unexpected expenses, such as funerals. Understanding how pre-paid funeral plans work is key.
Pre-planning your funeral is becoming more popular to avoid the emotional stress and pain of having to plan it at such a difficult time. You can choose the type of service that you would like and save money by making your own arrangements.
Pre-paid funeral plans are not always financially sound. Let’s look at the pros and cons of pre-paid funeral plans. We’ll also discuss what questions to ask in order to help you choose the best plan for you.
What are prepaid funeral plans?
Pre-paid funerals are plans that have been made with funeral homes. The money has been paid in advance or set aside for this purpose. There are many ways to accomplish this depending on your financial situation and preferences. These plans usually range in policy amounts from $10,000 to $25,000 and are paid monthly directly to the funeral home.
Pre-paid funeral plans allow people to make arrangements for their death. This plan is for those who don’t want their loved ones to have to make financial decisions or experience financial stress during grief. Experts warn that these plans could end up costing more than what you would pay for an average funeral, after all fees and charges are added.
Prepaid Funeral Plan Costs and Expenses
Pre-paid policies typically cost between $10,000 and $25,000. You have two options when purchasing pre-paid insurance policies. One, you can pay the full amount upfront, or you can make monthly payments over a three to five year period. You should expect additional fees beyond the funeral cost. You may have to pay $100-200 administration setup fees. Some plans also have ongoing maintenance fees of $50-150.
Is it possible to deduct prepaid funeral expenses from your tax bill?
Many people ask the question Are funeral expenses deductible? Although most funeral expenses cannot be deducted from the individual’s tax, the rules change when an estate pays for burial costs. According to the IRS, if an estate pays for the funeral costs (e.g. if it uses a pre-paid plan), the estate can deduct the expenses from its taxes. Before assuming that something is tax-deductible, consult a tax professional.
Do You Have to Prepay Funeral Costs?
While purchasing a pre-paid funeral plan from a funeral house is an opportune and wise decision, there are better ways to finance your burial costs. Experts agree that pre-paying for your funeral and working with a funeral home are risky.
Federal and state authorities have conducted investigations into pre-payment providers as well as funeral homes. They found serious violations of trust due to the lack of regulation. A reputable funeral home can embezzle or misspend your money. Some funeral homes close down before you have to pay for it. Some policies are almost worthless. The Funeral Rule, which was passed by federal authorities in 1984, provides some consumer protection. However, state laws differ and offer different protections.
A policy that covers final expenses and small funeral expenses can be an alternative to prepaying. These policies are closely regulated by many state and federal authorities. They offer greater flexibility than pre-paid funeral plans.
What are the typical expenses that a prepaid funeral plan covers?
Prepaid funeral plans can be customized to include all the goods and services you need for your funeral. You can include funeral home services, casket, flowers, transport, and any other items you need.
Once you have made a list, the funeral director will provide a price and this will form the basis of your policy.
You can select a guaranteed plan to specify the exact products and services you desire, and the price is locked in when you buy a prepaid funeral policy. This means that even if the price goes up, your loved ones will not have to pay more. This protection is not offered by nonguaranteed plans. This means that if you select a casket costing $3,000 and your death is imminent, the most expensive caskets will be $6,000; your loved ones will need to pay an additional $3,000.
How to prepay
You have two options when it comes to paying for a pre-paid funeral plan. One, you can work directly with the funeral home or through a prepaid contract provider. These providers can work with many funeral homes to arrange for plan payments. Once you have selected the products and services that you would like, you can set up a payment plan or contract with the provider.
The Pros and Cons of Prepaid Funeral Plan
It’s smart to consider all the pros and cons when you are considering purchasing a pre-paid funeral policy.
Funeral Insurance and Final Expense Insurance Policies
A funeral insurance policy is a way to cover your funeral expenses ahead of time. Also known as final expense insurance or Affordable funeral insurance. You can designate a beneficiary for the death benefit of life insurance policies. This could be a family member or friend. Life insurance benefits are not prepaid and can be used to pay for funeral expenses. The beneficiary can use them to pay for medical expenses, credit card debt and any other expenses that were incurred during the month.
You can name a funeral home your beneficiary in some states. Your family can rely on the funeral home to handle your death benefit with honesty and integrity if they are your beneficiary. Remember that your beneficiaries may include a funeral home. If this happens, you might not have any funds for your family.
Average Funeral Costs
The National Funeral Directors Association did a survey to determine the median funeral cost. The median funeral cost in 2021 was $7,848 with no vault. Adding the vault raised the cost to $9,000. This price does not include the headstone, burial plot, flowers, or obituary.
The NFDA has provided the following list of funeral costs that will be included in the 2021 median funeral expense:
Prepaid Funeral Plan vs. Funeral Insurance
It’s easy to think that a pre-paid funeral policy and a funeral insurance plan are the same thing. Pre-paid policies are paid directly to the funeral house where you signed the contract. Only the funeral home has access to the money. Your family might have to pay additional fees depending on whether the plan is guaranteed.
A funeral insurance policy, on the other hand, allows you more flexibility. Any beneficiary can be assigned to you, and they will be able to use the money for funeral expenses, final utility payments, or other outstanding bills. Your beneficiary can spend the money they have left if it is not used.
Prepaid Funeral Trust
You may be able to work directly with funeral homes and receive a trust-based prepayment plan. This allows your payments to be deposited into an interest bearing account. Your survivors can then use the money to pay for your funeral. The money accumulates interest up until your death.
Depending on where you live, the funeral home may only have to deposit 60 percent of the funds into the account. They can also keep 10% or more for administrative fees. If you miss payments, they can lock the trust so they can use the money to pay administrative fees. If you choose to cash out the trust, Some states allow funeral homes to keep as much as 30% of your money.
Irrevocable vs. Responsive Trusts
You can sign either an irrevocable or revocable trust when you sign a contract with a funeral house. An irrevocable trust is a contract that cannot be modified. This means that you cannot change your mind or get a refund. You must sign an irrevocable trust to be eligible for Medicaid exclusion.
However, a revocable trust allows you to cancel your decision and get a refund.
Questions to Ask Before You Prepay
These are the questions to ask before you buy a prepaid plan.
- Are the payments reasonable?
- What is the average time it takes for the policy to pay off? What happens if the policyholder dies before it is paid off?
- What happens if the funeral house closes?
- What consumer protection laws are in your state?
- What does the money you pay actually cover?
- What happens if you leave?
- What happens if your funeral costs go up before you are dead?
- What happens to the interest you earn on payments that you make?
- If you have a change of mind, can you cancel your contract and get your money back?
- Who gets the money if there is any left over after the funeral?
Prepaid Funerals & Medicaid
Pre-paid funeral plans are exempt from the Medicaid spend down process. This means that you won’t lose eligibility for Medicaid. Keep in mind, however, that the maximum amount you can deposit in a funeral trust is limited to $5,000 to $15,000.
Prepaid Common Funeral Arrangements & Services
Prepaid funeral insurance plans may not be the same. You can request to include any information you wish in your plan. Keep in mind, however, that what you include will affect the policy amount. Preset plans typically include:
- Funeral home expenses
- The death certificate
- Clergy expenses
- The price of the burial
Prepaid funeral home plans may not include the casket or headstone. You can usually customize your plan by working with a Funeral service plans.
Designating a Joint Bank account
After a person’s death, assets may be temporarily unavailable to anyone except the survivor. This problem can be solved by setting up a joint account. The survivor has immediate access to the funds. This is only useful if the funds are sufficient to cover funeral expenses. Another option may be available if you find it difficult to make deposits and leave the balance as is.
Establishing a Payable on Death Account
A Payable on Death account, also known as Totten Trusts, is established through your bank. This type of account allows you to name a beneficiary and funds will be available to the person you choose when you die. You can add, withdraw, close, or move the funds, and change the beneficiary. A POD account avoids probate.
Use an existing life insurance policy
It is likely that your death benefit from a life insurance policy , whole life insurance will cover your funeral expenses. It is important to inform your beneficiaries that you intend to use some of the money for funeral expenses.
Term insurance can expire before a person’s death. Some people decide not to renew their policy, so there won’t be any death benefit. Learn more about whole-life insurance.