What you should know before you purchase a prepaid funeral policy

Are Prepaid Funerals a Grave Mistake?

by Rick Kahler

"Richard Kahler died on December 30, 2015." Receiving that headline in a Google Alert certainly gave me a jolt.

Of course, the obituary was for a different Richard Kahler. He shared my love for travel; I'm sorry we never met.

Even though I'm not ready to see it used, I have already written my own obituary. It's one less thing my survivors will have to worry about. Plans are also in place for the distribution of my estate. I have not made arrangements for my funeral/memorial, though my estate will probably have enough money to adequately dispose of my remains.

Being able to pay for a funeral is a major concern of many seniors. Not wanting that burden to fall upon their loved ones, many people purchase burial or pre-need insurance.

While the intent behind purchasing one of these policies is noble, rarely are they a smart purchase. An article by Ron Burley on AARP.org entitle "Prepaid Funerals: A Grave Error?" quotes Josh Slocum, executive director of the Funeral Consumers Alliance and coauthor of Final Rights: Reclaiming the American Way of Death. He says, "Some prepaid plans can actually cost you more in payments over time than the amount they'll pay out on your funeral."

I recently reviewed such a policy that a client had previously purchased. The agent we spoke with said, "...any charges that the funeral home sets are guaranteed," assuring us the prepaid plan would cover all future funeral costs. But when we looked closely at the policy, a completely different picture emerged.

It was a whole life policy with a single initial premium of $3,600. The death benefit was a fixed amount of $3,692, just $92 more than the premium. A purchaser wanting out of the policy could get just $539 of their $3,600 back the first year; that amount was guaranteed to grow to $801 by the 20th year. There was no mention of funeral costs or guarantees of covering funeral expenses. The only item even remotely relating to funeral costs was that the beneficiary was the funeral home.

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With funeral costs growing at 5% a year, a funeral costing $3,600 in 2014, when this policy was bought, will cost $9,552 twenty years from now. The $3692 death benefit would then cover only a third of the cost of the funeral my client thought was "prepaid."

Here are a few other disadvantages of prepaid funeral policies, according to the Funeral Consumer's Alliance:

  • If you cancel, move or change your plan, you may not receive a full refund.
  • The cash-out value on an insurance policy is almost always much less than you originally paid.
  • The money you pay for funeral arrangements now won't be available for emergencies later.
  • The money spent today will rarely cover future funeral costs.
  • Survivors may not be aware of the policy.
  • If the policy is irrevocable the funeral home as the beneficiary cannot be changed.
  • If your family employs another funeral home, it may be difficult to get a refund.
  • By the time of your death, the funeral home may have a poor reputation, or be out of business

If you want to set aside funds for your funeral, my advice is to open an account with a bank or discount brokerage firm that has a Transfer on Death (TOD) option. Designate a trusted family member or friend as the beneficiary. On your death, the funds are immediately accessible to be used for your funeral. You can access your funds or change the TOD beneficiary at any time. This arrangement is far superior to purchasing a cash value insurance policy sold by a funeral home.

Reviewed March 2018

Take the Next Step:

  • Decide what you want your funeral to be like and discuss it with the person who will be responsible for it.
  • Don't miss these end-of-life planning tasks everyone needs to do.
  • Use this tool to maximize your retirement by determining the best age to take your Social Security benefits. Don't leave thousands on the table by taking Social Security at the wrong time.
  • As much as we don't want to think about, discover the many ways to save on funerals by visiting the Dollar Stretcher Library.
  • Subscribe to After 50 Finances. You've learned how to work smarter, not harder. This weekly newsletter is dedicated to people just like you. Subscribers get a FREE copy of our After 50 Finances Pre-Retirement Checklist, a list of everything you need to do to be ready for retirement.
Rick Kahler

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.

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