There are many ways to take care of the financial aspect of a funeral in advance. However, 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.
Prepaid Funeral Insurance and Annuities
Paying for funeral plans with a special “preneed” contract that is funded with an insurance policy or annuity offers several benefits. Many funeral providers will offer a guarantee that “locks in” the cost of the selected funeral goods and services at the current price. 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.
Preneed policies or annuities can be set up on installment plans with a set number of payments that fit into your budget. A specialized insurance company protects the funds until they are needed, and funeral funds grow either tax-free or tax deferred. Because these plans are held by an insurance company, the plans are completely transferrable to another funeral home should you move away from home. Most insurance policies and annuities offer 1 to 10-year payment plans, and they may be fully insured, dollar for dollar, or graded benefit plans:
- If you can meet a few basic health qualifications, fully insured plans offer the most protection for your family. You pay a small premium that offers extra coverage in case death occurs before you are finished making payments. This ensures that the full cost of your plan will be covered from day 1 by insurance. However, if you cancel the plan, you will only receive the cash value of the plan back.
- Dollar for dollar plans are annuities or increasing benefit plans that are exactly what they sound like. If you put a dollar in, you get a dollar applied to your plan. These plans are easier to qualify for health-wise, but they offer no insurance protection. Upon your death, your beneficiary will receive exactly what was paid into the policy, plus any growth the policy has accumulated. If your policy is paid up, this should not pose any problem. But if death occurs before your payment plan is complete, the cost of your funeral may not be completely covered, and your loved ones would have to pay the difference.
- Graded benefit plans offer a blend for those who cannot qualify for a fully insured policy because of health complications, but who want to be covered by some insurance protection. The benefit usually starts out with accidental coverage only, but 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.
Prepaid Funeral Trusts
Funeral trusts are another option for entering into a preneed contract with a funeral provider, and some funeral homes even offer a guarantee that “locks in” current prices for the funeral. Trusts offer the benefit of growth, so they are a popular option for those planning ahead. Some states require funeral homes to deposit only a percentage of funds into the trust, while others require 100% of funds to be deposited. Be sure that you clearly understand the terms of your funeral trust before entering into a contract, and pay special attention to the portability of your trust funds should you move. Always verify with the manager of the trust that your funeral funds have been applied to your account as dictated by your contract.
Understanding Irrevocable Funeral Plans
Funeral contracts such as policies, annuities, or trusts can be set up as Medicaid-exempt assets if you are trying to qualify for Medicaid status for long term care at a nursing home. Generally, if your plan is over $1500 per spouse, it must be set up as irrevocable—This means that the funds can only be used for funeral expenses under the law, and the government recognizes that these funds are no longer available to you to be used for long term care costs. Setting aside burial funds in an irrevocable account allows you to protect a larger amount of your assets as burial funds for you and if applicable, your spouse. If you’d like to learn more about how to qualify for Medicaid with a properly structured burial plan, see our article here.
Personal Account/CD/Pay on Death Account
At first glance, these types of personal accounts may seem like a good option. A pay on death account can be set up to pay a named beneficiary upon your death, which is beneficial because your assets will generally not be available to your heirs until your estate has been settled or your assets have gone through probate. However, there are a few disadvantages to maintaining a personal pay on death account. These types of accounts do not “lock in” the current prices of a funeral home by entering into a preneed contract. This means that with each year that goes by, the purchasing power in your personal pay on death account actually goes down as costs go up. A funeral today may cost $6,000, but in ten to fifteen years, that same funeral could cost close to $8,000 or more. These types of accounts do not generally offer a sufficient amount of interest to offset price increases over time. In addition, these types of accounts are also considered as countable assets by Medicaid. Should you require government assistance with long-term care costs, these accounts would not be protected as exempt assets because they are not irrevocable funeral plans. These accounts may also be at risk for being used or seized due to unforeseen circumstances such as civil judgments, bankruptcy, or divorce.
Consider the Pros and Cons of Each Payment Method
With any option that you choose, you must weigh the risks and benefits of each option. Even stashing your money under the proverbial mattress has its risks (flood, fire, theft, etc.). On one end of the spectrum, you have a fully insured prepaid funeral plan that offers you the highest amount of protection, but that costs a bit more in premium payments. You also must consider whether you are likely to lapse on your policy while making payments. If that is the case, then a dollar for dollar annuity may be a better option, which is very similar to a savings account with growth applied. On the other end of the spectrum, you have the option of a personal account, which could ultimately end up being used for other purposes before your death. Plus, because many funeral homes guarantee pricing on services and merchandise with a preneed contract funded with an insurance policy, annuity, or trust, your family may be required to pay more than they would have otherwise.