It sounds great in theory: Preplan and prepay your funeral expenses so your children and heirs won't have to make expensive and difficult decisions while grieving. About 23 percent of people over age 50 have prepaid at least a portion of funeral or burial expenses for themselves or someone else, according to a 2007 AARP survey. But not all pre-paid funeral contracts deliver on their promises as funeral homes go out of business, change hands, or raid the money consumers thought was safely invested in trust funds. "You go down to the funeral home and they pat you on the hand, but that's a false sense of security," says Joshua Slocum, executive director of the nonprofit Funeral Consumers Alliance. "In trying to do a good thing for your kids by prepaying, you're actually guaranteeing that they are not going to have a good time." Here's what you need to know about funeral prepayment plans.
Comparison shop. The average cost of a funeral is $6,500, according to the National Funeral Directors Association—and that doesn't include cemetery costs and extras like flowers, obituary notices, and limousines that can quickly boost the price to well over $10,000. But a full 79 percent of seniors report they have not done any comparison shopping for burial or funerals, an AARP study found. Instead of just picking the funeral home closest to your house or the one where your grandmother was buried, shop around for the best prices. You don't have to buy the first expensive package the funeral director quotes you, either. The Federal Trade Commission requires funeral directors to give you itemized prices in writing and over the phone, and you can choose exactly which individual goods and services you want to purchase. You also don't have to buy every service from the same funeral home. The funeral provider may not refuse or charge a fee to handle a coffin you bought elsewhere, the FTC says.
Follow the money. Among the 20 million individuals who have prepaid for funerals or burials, 53 percent paid the entire cost as a lump sum, while an additional 44 percent are paying or paid in installments over time, AARP found. "Learn exactly what is going to happen with your money if you prepay," says Bob Biggins, president of the National Funeral Directors Association, which published a funeral preplanning bill of rights. "The funeral home is required to disclose that to you." But 40 percent of seniors who prepaid report not knowing where the funeral director has placed their funds. Typically, the funeral director puts your money in a trust fund account until needed or purchases a life insurance policy that will be used for expenses. Each state has different laws governing the percentage of cash that must be kept in trust. "There is a national epidemic of stolen prepaid funeral money going on right now," warns Slocum. So, research the funeral home before you hand over any cash advances, find out which bank they use, and talk to some references.
Ask about refunds and cancellations. Most states don't require full refunds if you cancel. Find out which circumstances allow you to cancel the contract and what percentage of your money will be returned if you want to change your plans. "There is no guarantee that you will get it back or that you will get the same amount that you put into it," cautions Mark Harris, author of Grave Matters: A Journey Through the Modern Funeral Industry to a Natural Way of Burial. Also, ask if you can transfer the funds to a different funeral home should you decide to move out of the funeral home's service area. "All pre-need money should be transferable," says Biggins. And get something in writing about what happens if the funeral home should go out of business or come under new ownership.
Read the fine print. Contracts can differ greatly. "Just because you have bought into a guaranteed installment plan that is supposed to cover all the costs for a funeral doesn't mean it is going to cover all the expenditures when your family looks to cash out that policy," says Harris. For example, if you die at a location outside the service area there may be an extra charge to transport you to the funeral home. Although embalming is usually covered by a prepaid plan, more involved processes like restoration embalming may not be covered. And as the years go by, the coffin you selected in advance may no longer be available. So, then your heirs might have to buy one that is more expensive. "The problem with these prepaid plans is not all the costs can be guaranteed," says Harris. Ideally, if a promised good is not available, one of equal or greater value should be substituted at no extra cost.
Consider saving on your own. Instead of prepaying money to a funeral home you can set up a "pay on death" account, also known as a Totten trust. At the time of death your designated beneficiary is able to use that account for funeral expenses immediately. These accounts are portable and can be used at any funeral home, and you get to accrue the interest instead of the funeral home. You should also put your preferences in writing, give copies to family members and your attorney, and keep a copy in a handy place. But don't designate your preferences in your will, as a will is often not found or read until after the funeral, and avoid putting the only copy of your preferences in a safe deposit box that could be difficult for relatives to get to.
Ponder cheaper (and greener) options. A full service burial at a funeral home is not the only option. "People should be able to find a crematory in their area that is under $2,000," says Buddy Phaneuf, a fourth-generation funeral director and president of the Cremation Society of New Hampshire. And AARP found that 21 percent of seniors expressed interest in a burial that is more environmentally friendly than a traditional burial with embalming. "It's a funeral that does not involve the use of toxin or waste," explains Joe Sehee, founder and executive director of the Green Burial Council. "No formaldehyde-based embalming, which is not required in any state, no metal caskets, no concrete burial wall." But unlike many environmentally friendly innovations, this one can actually save you money. "In some markets it is as low as $1,500," Sehee says.