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Paying for a funeral after a loved one dies can be a huge burden to a grieving family. That’s why preplanning your funeral and setting aside funeral funds ahead of time is such a gift! When you plan ahead, you lift the burden of planning and paying for a funeral off your family’s shoulders, making things a little easier for them.

There are many ways you can take care of the financial aspect of a funeral in advance. While many families choose to pay for a funeral with a life insurance policy or a final expense plan, these options are not specifically intended for funeral funds and may need to be used in other ways.

When it comes to protecting your funeral funds, not all payment methods are created equal. Each method has its own risks and benefits, so it is up to you to decide which payment method is right for you and your family. Keep reading to learn about the different ways you can set aside funeral funds and the benefits and drawbacks of each type!

1. Prepaid Funeral Insurance and Annuities

Glasses on top of a paper that says "Annuity"

One way to set aside funeral funds is with prepaid funeral insurance policies or annuities, also called preneed contracts. These contracts can be set up on installment plans, usually between one and ten years, with a set number of payments that fit your budget. A specialized insurance company protects the funds until needed, and funeral funds grow tax-free or tax-deferred. Because an insurance company holds these plans, they are transferrable to another funeral home should you move to a different area.

Some funeral homes guarantee the cost of the selected funeral goods and services at the current price when you pay ahead with a preneed contract. If you expect to live another 10, 15, 20, or even 30 years, this type of contract could save your family hundreds, if not thousands, of dollars. Plus, a properly structured prepaid funeral plan may help you qualify for Medicaid assistance for long-term care or nursing home expenses.

Benefits

✅ Funds grow (tax-free or tax-deferred)

✅ Customizable to fit your budget

✅ Highest protection

✅ Transferrable

✅ May be able to benefit from today’s prices

✅ Owe no money once all installments paid

Drawbacks

Must keep up with regular payments until the plan is paid in full

❌ Often have higher premiums

Certain plans may require health qualifications for insurance coverage

Three Different Types of Policies

While you can choose to pay in full for your prepaid funeral insurance policy, you can also pay over time. There are three different kinds of prepaid funeral insurance policies and annuities: fully insured, dollar-for-dollar, and graded benefit. Each of these has its own benefits and drawbacks.

Fully Insured Plans

Person's hands holding a family made out of paper

With a fully insured plan, you pay a small premium that offers extra coverage in case death occurs before you finish making payments. That means insurance covers the full cost of your plan from day one. These plans offer the most protection for you and your family, but you must meet a few basic health qualifications. And, if you cancel the plan, you will only receive the plan’s cash value back.

Benefits

✅ Full cost covered from day one

✅ More protection

Drawbacks

❌ Must meet health qualifications

❌ Full refund of payments made not guaranteed if you cancel

Dollar-for-Dollar Plans

Stack of American dollar bills

On the other end of the spectrum are dollar-for-dollar plans. These plans work exactly how they sound – when you put a dollar in, another dollar is applied to your account. If you fully pay for your policy before the time of death, there should be no issues. But if death occurs before the completion of your payment plan, the insurance may not cover the full cost of your funeral. In that case, your loved ones would have to pay the difference.

Benefits

✅ Fewer health qualifications

✅ Beneficiaries receive policy payments plus any growth

Drawbacks

❌ No insurance protection

❌ Cost of funeral may not be fully covered if death occurs before the plan is paid in full

Graded Benefit Plans

stacks of coins organized from smallest to largest with a jar of coins at the end

A graded benefit plan falls in between the other two types of funeral insurance. These plans offer a blend for those who cannot qualify for a fully insured policy because of health complications but who want some insurance protection. The benefit usually starts with only accidental coverage. Then, after a certain amount of time (usually 1 to 2 years), the policy converts to a fully insured plan that covers the full cost of your plan should you die before the policy is paid up.

Benefits

✅ Fewer health qualifications

✅ Eventually offers full insurance protection

Allows for some insurance coverage even with health complications

Drawbacks

❌ Takes more time to become fully insured

Single Pay Plans

Unlike the other insurance and annuity plans, single pay plans don’t

Benefits

✅ Don’t need to keep up with payments

Drawbacks

❌ Must pay all at once

2. Prepaid Funeral Trusts

Person writing on a document

Like prepaid funeral insurance and annuities, funeral trusts specifically cover funeral costs. However, there are a few differences. Like insurance and annuity plans, trusts offer growth, but they also produce annual 1099s that require annual tax payments on growth. Funeral trusts also do not have health qualifications that you must meet.

Remember to check your state’s laws about trusts. Some states require only a percentage of funds to be deposited into the trust, while others require 100%. Make sure you understand the terms of your trust before signing a contract, and pay attention to the portability of your funds if you move. Additionally, you should verify with the trust manager that your funds have been applied to your account per your contract.

Benefits

✅ Don’t have to keep up with payments

✅ Growth options

✅ No health qualifications

Drawbacks

❌ Must pay taxes on growth annually

3. Personal Account or Pay on Death Account

Person placing money into a light pink piggy bank

Some people plan to use a personal account or a pay on death account to store funds for their funeral. You can set up these accounts with a named beneficiary, which makes transferring assets a bit easier after death.

However, these accounts usually have lower interest rates than prepaid funeral insurance and won’t grow as much. Plus, the recipient of the account will receive the proceeds whether or not they agree to pay for a funeral. And, if a funeral home is the beneficiary on the account, then they receive the money even if they are not the ones who provide the funeral. Additionally, Medicaid considers these accounts non-exempt assets, so you may need to spend the money on nursing home care to spend down your assets.

Benefits

✅ More flexible options

✅ Doesn’t require regular payments

✅ More control over the account

Drawbacks

❌ Not flexible

❌ Lower growth rates

Medicaid considers this a countable asset

❌ May be used or seized during unforeseen circumstances (civil judgments, bankruptcy, divorce, etc.)

While each option has pros and cons, it’s up to you to figure out what’s best for you and your family. Whether you choose to go with a plan that offers more security or a more flexible but less secure option, planning ahead for the financial aspect of your funeral benefits your family greatly. As you decide which type of plan to use, please consult your local funeral director. They have years of experience helping with funerals, and they can help you and your family select the best option to protect your funeral funds.

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