Prepaid Funerals And Pre-Need Insurance: How Do They Work?

Jake Irving

Jake Irving is the Founder of Policy and has contributed to articles for Synchrony Financial, GoBankingRates, Yahoo News, UpCity, Zapier, LegalZoom, and more.

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Many planning tools and products are available to help families prepare for the financial requirement of a funeral. Prepaid funerals are a common option for research and review.

Before purchasing one of these plans, it is essential to know the basics and questions to ask the funeral home.

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How Do Prepaid Funerals Work?

Prepaid funerals allow people to pay in advance for the costs associated with their funeral. The process is designed to make funeral planning easier emotionally and financially for the grieving family. This helps avoid family miscommunication or disagreements with no loved ones being asked to take on an unexpected financial burden. 

This product is also known as a pre-need funeral insurance plan.

What is Included in a Prepaid Funeral Plan?

A wide variety of items can be prepaid when planning your funeral. Ultimately each funeral home will decide what can be included in the plan, but the following are standard items.

  • Funeral Home Services
  • Cremation
  • Casket
  • Flowers
  • Transportation
  • Etc.

How Much do Prepaid Funerals Cost?

Based on your payment schedule, you can expect to pay between $100 and $300 per month. Most pre-paid funeral plans offer $10,000 – $25,000 policy amounts. Once you have decided the amount of money required for your funeral, you will have different payment options. Funeral homes typically have four financing options.

  • One lum-sum
  • 3 years
  • 5 years
  • 10 years

It is vital to watch out for any hidden fees that could be associated with your policy. For example, some plans require administration start-up fees, and some even require an ongoing maintenance fee.

How do I Take Out a Pre-need Funeral Plan?

You can work directly with your chosen funeral home or a pre-paid contract provider. These providers work with a handful of funeral homes and arrange the payment plans. After selecting the services and items you would like, you will set up a payment plan with either the funeral home or the contract provider.

woman with ipad and glasses

Are Prepaid Funeral Plans Worth it?

Although prepaying for funeral costs is an admirable thought and seemingly wise idea, there are some red flags to watch for. Many variables should be considered when taking out a prepaid funeral plan because of the limited flexibility.

The most valuable benefit of prepaid funerals is that they can be inflation-proof. When prepaying for a funeral, ensure your plan has the word “guaranteed” in it. This means the price you agree upon for a specific item will stay that price even if inflation makes that item more expensive in the future.

Guaranteed: The price of funeral-associated items is locked in.

Non-guaranteed: Price is not locked in, and the family can be asked to pay more at the time of the funeral.

What are the Pros and Cons of Prepaid Funerals?

The biggest pro is eliminating the burden for loved ones to plan your funeral, and they will honor your personal decision. Some notable cons are that you cannot transfer the plan, there can be unexpected fees, and things that are not covered.

More advantages and disadvantages of prepaid funeral plans are listed below.

Pros Cons
Allowing for all funeral decisions to be preplanned and paid for. This eliminates the guesswork for grieving families.
The funeral home could go out of business. If this happens, families could be left in a difficult financial situation. (Speak with your specific funeral home to better understand this situation.)
Guaranteed pricing can help you secure today's pricing without worrying about inflation.
If you change your final wishes, there is a chance that you will not receive the money back that has been paid into the plan.
Allows individuals to create the exact final arrangements that they want.
Locked into the location. It is very rare to be able to transfer your prepaid funeral plan to another funeral home.
Good for individuals who have no surviving family to list as a beneficiary
This plan only allows the funds to be used for funeral and final arrangements.

Understanding Prepaid Funeral Trusts

A funeral home can help facilitate a funeral trust. Your payments will be placed into an interest-bearing savings account. This money will grow until your death. At this time, the total will then be used to cover funeral costs. There are different requirements for funeral trusts, depending on which state you live in.

Within a prepaid funeral trust, there are irrevocable and revocable trusts.

The Difference Between Revocable and Irrevocable Trusts

Your prepayment can be placed into two different types of trusts.

Revocable Trust: This allows you to receive a refund on your money if you change your mind about your final arrangements.

Irrevocable Trust: You are locked into your decisions and cannot receive a refund with this option. You must use an irrevocable trust when using a funeral trust to help with a Medicaid exclusion.

Medicaid and Prepaid Funerals

Prepaid funerals in an irrevocable trust are excludable from the Medicaid spend-down process. However, look at your specific state’s rules and regulations, as many only allow $5,000 – $15,000 to be placed into an irrevocable trust.

Protecting Your Money

Most funeral homes are trustworthy and honest establishments with long-standing reputable credibility, but a small percentage are not. Therefore, you should have two options when funding your prepaid funeral plan.

Lumpsum Payment: This one-time payment is deposited into a trust that gains interest and value over the years.

Monthly Installment Payments: Also known as a pre-need funeral insurance plan, this allows individuals to fund their funeral over time. The monthly payments will go to a life insurance company.

Where seniors have had financial problems in the past with prepaying is when the funeral home embezzles the money. However, these options do not require you to pay the funeral home directly. Regardless, take caution if you are ever asked to write a check directly to the funeral home for prepayment.

women sitting at table

Prepaid Funeral Plans Vs. Final Expense Insurance

It is easy to confuse the different products available for families to plan for a funeral. However, prepaid funeral plans and final expense insurance are different. Prepaid plans typically require the beneficiary to be the funeral home. This significantly limits what the money can be used for.

In contrast, a final expense insurance policy can have any beneficiary listed that the policyholder chooses. There are no restrictions on what the beneficiary can use the money for, so they have the freedom to choose. The funds can cover funeral expenses, outstanding debt, medical bills, etc.

Prepaid Funerals (Preneed) Final Expense Insurance
Typically the payout must be used at the funeral home it was purchased from
Can use the payout for anything
Additional benefits are not usually included with the plan
Additional benefits are typically included with the plan
Death benefit is paid to the funeral home
Death benefit paid directly to the beneficiary of your choosing
Prices are set by the funeral home that is used (no price shopping)
Families can price shop funeral homes to get the best deal

Final Expense Insurance

Final expense insurance for seniors is an excellent alternative to prepaid funerals. Also known as burial and funeral insurance, this plan offers three permanent benefits that will allow seniors to plan for their funerals and other costs associated with death.

The best burial insurance companies are financially stable and have very competitive premiums. No medical exam is required, and the monthly cost is very affordable.

Price Never Increases: The monthly premiums are locked in and will never change. This allows seniors on a fixed income the peace of mind to afford the policy well into the future.

Coverage Never Terminates: The death benefit is permanent, which means seniors will never outlive their policy. This lifts any burden off the shoulders of families and will assure a distribution will be paid out.

Builds Cash Value: With every payment made, a portion will go towards the cash value. Over time this amount will grow and can be borrowed.

Other Funeral Planning Options

Joint Bank Account: Once someone passes away, their assets are not available until the estate has been settled. A joint bank account can help surviving family members with this issue. This allows the survivor on the bank account to immediately access the funds.

Payable on Death Account: This option is set up through your financial institution. With this plan, the account holder lists a beneficiary, and once they pass away, the funds will be available to the listed recipient. Payable on Death (POD) will avoid probate.

Existing Life Insurance Plan: Using an existing life insurance policy is a popular option to cover your funeral expenses. If this is the method you decide to use, it is essential that you inform your beneficiary that you would like a portion of the money to be used for your funeral costs.

Communicate with Your Family

When loved ones pass away, emotions are high, and a detailed guide will help everyone come together and carry out the final arrangements as planned. Regardless of which financial funeral planning tool you use, communicating your plan in detail to your family is of the utmost importance.

How Much are Funerals?

Average funeral costs vary from state to state. However, the National Funeral Directors Association (NFDA) has put together a cost breakdown of what can be expected for funeral expenses.

Basic Funeral Services & Costs

Non-declinable basic service fee
Transfer of remains to funeral home
Other preparation of the body
Use of facilities for viewing
Use of facilities for the funeral ceremony
Service Car/Van
Basic memorial printed package

Final Thoughts About Prepaid Funerals

a. Prepaid funerals can be beneficial for particular circumstances. This includes seniors who know exactly where and how they would like to be buried.

b. The main issue with prepaid funerals is the unknown. If you change your mind on where you would like to be buried or any other details of your funeral, you may be on the hook for the money that has been paid into the plan.

c. Even if you are confident of your final wishes, there are still risks, including funeral homes going out of business.