How prepaid funerals work

Insurance, trust funds and bank accounts can be used to pay for funeral plans in advance.

  • By Geoff Williams,
  • U.S. News & World Report
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Prepaid funeral plans tend to spark conversations around two of people's least favorite topics – finances and death. But if you don't want to leave your loved ones a hefty funeral bill, it's a wise idea to discuss funeral plans in advance.

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According to the National Funeral Directors Association, the national median cost of a funeral with viewing and burial was $7,360 in 2016. And that's not factoring in other costs, like what you might spend on flowers, an obituary or a gravestone. That's why Tom Scarda, the CEO and founder of the Franchise Academy, a franchising coaching and education company in New York City, was so grateful that his 79-year-old father had prepaid for a funeral before he passed away two years ago. "As the oldest child, all I had to do is bring his suit to the funeral home – literally," Scarda says.

If you're pondering a prearranged funeral, here's what you need to know.

Q: What is a prepaid funeral?

A: A prepaid funeral is simply making funeral arrangements before you – or a loved one – passes away. The most compelling reason to have a prepaid funeral is that you won't have to worry that your family will be dealing with both a heavy emotional and financial burden while grieving.

Scarda's dad, who was a police officer, used to joke to his kids that he was James Bond. And so Scarda's father decided he wanted to be buried in a tuxedo, Scarda explains. Not having to worry about the details of arranging funeral plans was a relief, Scarda says. "My brothers and I did not have to worry about picking out a casket and doing all those necessary things while grieving. It really helped with the grief in the moment," he says.

Q: How do you set up a prepaid funeral?

A: One way to set up a prepaid funeral is creating a joint bank account with a loved one solely for the purposes of paying for a funeral. That way, the surviving family member has access to the bank account and can use that money for your funeral. If you don't set up a joint account, your family members may be able to get access to your checking account, but not until the estate is settled, and that can take weeks or months.

You can also opt to set up a Payable on Death account through your bank. You would name a beneficiary, and when the time comes, the money would then be available to that person to use for your funeral. The key is ensuring you put enough into that account for a proper funeral.

You could also buy funeral insurance, also known as burial insurance or a final expense insurance policy to cover the cost of funeral expenses. Typically, the insurance coverage costs $50 a month, and generally, people purchase a $10,000 policy. You may spend more or less per month, depending on your age, gender and health.

Q: What are the benefits of paying a specific funeral home?

A: Unless you're living on borrowed time, most experts suggest avoiding this approach and opting for another prepaid funeral arrangement. If you're in good or reasonable health, you might outlive the funeral home, which could go out of business. Or perhaps the funeral home management will change, and the funeral home will no longer be a place that you think your family will be happy working with. Or maybe you'll want to move to another part of the country, where the climate is warmer and your kids have moved. Experts say there are too many risks with prepaying a funeral home.

Jeff Root, who is based in Austin, Texas and owns Rootfin.com, a life insurance agency, argues that insurance is the way to go because the family has more options than prepaying a funeral home. Whatever you do, "Don't assign a life insurance policy to a funeral home ahead of time except to eliminate it from counting as an asset when qualifying for Medicaid. But people do it every day. You can't talk some of them out of it," Root says.

Q: How can you make prepaid funeral plans with a funeral home?

A: If you decide to go this route, you could set up a revocable trust with a funeral home to make prepaid funeral arrangements. Typically, you would sign a contract to pay for your funeral in installments, and the funeral director would deposit your payments into an interest-bearing account. When you pass away, the funeral director, who is also the trustee, would use that money to pay for your funeral.

Whatever you decide, it's important to share your plans with loved ones and that you take care of this last bit of financial business in advance, even as unpleasant funeral plans are to think about. "I really feel strongly that a prepaid funeral arrangement is the best parting gift a person can give to those they leave behind. It's almost selfish not to do it," Scarda says.

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