Funding Options for Advance Funeral Plans – By Dean Lambert

by MSO
a couple discussing funeral planning with an insurance agent

Tens of thousands of families each year face their “worst days” with a lighter burden because the funeral is planned and funded in advance.

Recent consumer studies show that a majority of consumers believe advance funeral planning is a “good thing to do.” One of the benefits cited is the ability to provide funding for the funeral ahead of time so that surviving family members do not have to bear the expense burden when that difficult but inevitable time arrives.

Depending on where one resides, funeral home owners often provide a “price guarantee” which means they will accept proceeds from a trust or insurance policy as full payment for the funeral at the time of death. Like anything else, funeral costs increase every year so this could be a big savings for a family struggling with the loss of a loved one, especially if survivors are financially strapped.

So, how can a consumer obtain a “price guarantee” on a prearranged funeral? It all depends on the funding method.

There are a number of ways to set aside funds to provide money for funeral-associated costs. In this article we will explain three of them: Final Expense insurance, Pre-need Insurance and Pre-need Funeral Trust.

Final Expense Insurance

Final expense insurance, sometimes referred to as “burial insurance,” is typically a term or whole life insurance policy that ranges in face value between $5,000 and $50,000 for which a consumer may name any beneficiary. Typically this beneficiary is a family member who would receive the benefit to carry out your wishes.

A final expense policy is not tied to a funeral contract. This means the beneficiary would use the insurance proceeds to pay for an informal funeral plan that might be on file with a funeral home. Often, however, there is no record of the decedent’s wishes and the survivors are left to decide what to do. Consequently, the beneficiary may choose to use all of the insurance proceeds for final expenses or in the alternative, use very little and keep the difference.

If there is an informal funeral plan on file with a funeral home and no “goods and services” contract tied to the insurance plan, the beneficiary and others involved in planning the funeral will be charged current prices for funeral goods and services. For this matter, ANY life insurance proceeds may be used to help pay for funeral costs. Thus, “final expense” insurance provides something the decedent specifically intended to be used to help pay funeral costs so that other life insurance policies may be used for other needs.

Funding Specific Goods and Services

Consumers have two basic choices for funding an advance funeral plan tied to specific goods and services desired at the time of death: A pre-need funeral trust or pre-need insurance.

About Funeral Trusts:

Funeral trusts may be established by depositing money into an interest-bearing trust account. At the time of death, the proceeds are disbursed and applied to the cost of the funeral.  If there are excess proceeds available, they are disbursed to the deceased’s estate unless the pre-need contract states otherwise. If there are not sufficient funds to cover funeral costs and the firm did not specify a price guarantee at the time arrangements were made, your estate or family may be responsible for paying the balance.

Some characteristics of a funeral trust include:

  • If a pre-need contract is cancelled the full amount of the trust (minus any fees and taxes permitted by state law) will be returned to the consumer.
  • Investment vehicle for all regardless of age and health status.
  • May be transferrable to another funeral home depending on trust language.
  • Only pays what has been put in plus any interest realized. If consumer dies before all payments are received, funeral home will require the cost difference at the time of service.
  • Potential tax consequences to consumer or to the funeral home on any realized interest.
  • No insurance guaranty association backing in case of institution failure, fraud or embezzlement.
  • Annual fees are paid out of the trust income.

About Pre-need Insurance:

Pre-need insurance is different from “final expense” insurance in that it is “tied” to a contract to provide funeral goods and services. In many cases the funeral home will provide a price guarantee, meaning the firm will accept the available insurance proceeds as complete payment regardless if the current price of goods and services exceeds the available benefit. Most insurance companies offer several payment plans including making a single premium payment and time payment durations of 3, 5, 7, and 10 years. A significant benefit in addition to the price guarantee offered by most funeral homes is, if you die before the policy is fully paid-up, you can receive the full benefit of the insurance policy.

Some characteristics of pre-need insurance include:

  • Tax-free
  • Policy is backed by state and national insurance guaranty associations
  • 100% of all consumer funds are placed in the policy
  • The policy is transferrable to any funeral home of the consumer’s choice. (However, the funeral home to which the policy is transferred may or may not honor the guarantee or be able to provide the specified goods and services.)
  • Full-benefit policies pay the face amount plus growth credited prior to the time of death if the policy is in good standing, regardless of whether all premiums have been paid.
  • All money and growth remain throughout the life of the policy – no fees are removed.
  • Consumers are given a 30-day free look during which they may cancel and receive all their money back. (May also apply to some trusts depending the state.)
  • Cost of the insurance varies depending on the age and health of the consumer.
  • Consumer may pay more in premiums than the cost of the prearranged funeral if they outlive their statistically expected mortality.
  • Payment plans may not be available for consumers over a certain age or with serious health issues.
Dean Lambert Homesteaders Life Company

Dean Lambert is the V-P of Marketing for Homesteaders Life Company.

Summary

It is important to ask questions and fully understand the funeral funding options available to you. Do not be afraid of asking questions of your funeral director or pre-need representative. A funded prearranged funeral is an important part of your complete end-of-life plan. Your survivors will be able to focus on the memories of your life as opposed to the many tasks — and expenses — involved in your care after death.

Dean Lambert is the VP-Marketing Homesteaders Life Company.

For more information on Homesteaders Life Company visit their website: www.homesteaderslife.com

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