Funding a Preplanned or Prearranged Funeral

May 14, 2018 | by the National Care Planning Council

Guaranteed Issue Life Insurance

One way to informally provide future funds for a prearranged funeral and burial is to buy a life-insurance policy specifically designed for this purpose. And of course anyone who has an existing life-insurance policy that is a permanent contract -- will not lapse at some future date -- can use all or a portion of that death benefit to pay for future funeral costs. Traditional life insurance policies are generally designed for younger people who are in reasonably good health. In addition these policies are usually not available in amounts less than $50,000 in face value. Older people may qualify for these policies, but many elderly who are in good health may not want to buy a policy that large since it could be very expensive.

Some life insurance companies specialize in permanent life insurance burial policies for older ages and for people with health problems. These so-called "final expense" policies are designed to accommodate smaller amounts of death benefit for people who might normally be uninsurable through traditional policies. Available death benefits may range from $2,500 to $25,000. As an example, for a 65-year-old in reasonably good health, a permanent policy with a $10,000 death benefit might cost about $42 to $87 a month depending on the gender and smoking habits of the applicant.

The policy will generally have cash value after a certain number of years and may also increase in death benefit value in future years. For those who have cancer or heart disease or life-threatening health problems or in some other way may be uninsurable there are so-called "guaranteed issue" or "guaranteed acceptance" policies. A $10,000 policy like this for a 65 year old might cost $75 to $87 a month depending on gender.

In order to protect itself from too many premature death claims with guaranteed issue policies, the insurance company usually has some kind of a waiting period on these policies before a benefit will be paid. One arrangement might pay nothing if death occurs in the first six months, 50% of the death benefit in the second six months, and the full death benefit after the first year. Another policy might simply exclude payment for any death claim in the first two years. This policy would probably be less expensive than the one quoted above.

A major problem with final expense policies is that overhead costs, claims, commissions and other costs associated with managing these contracts make premiums much higher in proportion to death benefit than with larger policies of $100,000 or more. Final expense policies are also generally designed to be more lenient in covering the death of policyholders who may have major health problems. And those final expense policies that guarantee coverage regardless of health are obviously going to pay out death claims sooner than a policy that required someone to be in good health when they applied. All of these factors make final expense policies very expensive relative to the death benefit.

Someone in good health buying one of these policies could live a long time. Premiums are generally set up to be paid monthly or yearly as long as the person lives. Some people living a long time and paying into one of these policies could end up paying significantly more in premiums than the policy would pay at death. Such a policy is only a good idea if a person is in poor health and not expected to live very long. For someone in good health, putting money away in a savings account is usually a better option.

PreNeed (Pre-Paid) Funeral and Burial Plans

Another way to plan in advance is to sign a formal contract called a "preneed funeral plan", where money is held in a trust, in an escrow account or paid through an insurance policy. Parts of or all of the funeral service and burial are designed in advance and prefunded in advance and the family has little to do but show up. This type of planning has become very popular in recent years. A survey conducted by the AARP in 1999, found that two out of five people over age 50 had been approached to pre-purchase funerals and burial goods and services.

An AARP survey in 1998 indicates that 32% of all Americans over age 50, roughly 21 million people have prepaid some or all of their funeral and or burial expenses (but not necessarily through a formal preneed plan). Breaking that down, about 25% of the over age 50 population have prepaid for their burials (cemetery plot, mausoleum or niche), 18% have prepaid for headstones, urns, caskets , grave liners or vaults, opening and closing of graves and so on and 13% have prepaid for goods or services from a funeral home or funeral director. The same article indicates that over $25 billion is being held in pre-need trust funds. Roughly another $25 billion is waiting to be paid out in life insurance benefits. Prepaid or preneed funerals and burials are big business.

Prepaid funerals and burials funded privately by the family, or paid from an individual life insurance policy and arranged informally through a funeral home or funeral director, are generally not subject to state regulation. Any formal arrangement through a second party or involving a contract is subject to regulation in all states. Each state has adopted different rules as to who can sell these plans, what the plans can provide, what contract provisions must be, how the plan is to be funded and what recourse purchasers might have in the event of fraud or default. All states call these regulated plans "preneed" funeral and burial arrangements.

Here are some advantages to why one would want to buy a preneed plan for funeral and burial services and goods.

• It provides peace of mind knowing these arrangements have been made in advance
• It avoids the burden on family members to make decisions when they are most vulnerable to manipulation
• It allows one to virtually control from the grave by determining in advance the funeral products, funeral services, burial products and burial services that one would prefer having for final arrangements
• It helps the family to avoid taking loans, arranging finance plans, raiding savings or selling assets to pay for a funeral and burial
• It guarantees (for many contracts) that if products and services currently purchased are not available in the future, equivalent substitutes will be provided at no additional cost.
• It locks in guaranteed prices (available with some contracts) forever
• It allows for inflation in future costs (for those contracts that do not guarantee prices) by investing money in an interest-bearing account or buying life insurance that increases in value over time
• Depending on the contract, it may allow for transfer to another funeral home or for partial or full refund
• Unfortunately, there are also problems with prepaid, preplanned final arrangements
• With some trust fund and insurance funding options there may be no refund if someone wants to cancel the plan in the future
• If a purchaser moves to another state there may be no transfer options or there may be different rules governing the funding option
• In some contracts, interest earnings on investments resulting in excess money not needed for the plan may be retained by the funeral home or funeral director
• On installment plans interest may be charged but not credited to the account
• In certain insurance funded contracts, the ownership or death benefit may be irrevocably assigned to the contract holder, preventing the purchaser from enjoying ownership rights in the policy
• In certain insurance funded contracts, a growth in the death benefit over time that exceeds the cost of the pre-need plan services and goods may be pocketed by the contract holder instead of being refunded
• If the contract provider goes out of business or fails to secure 100% of the funds for future payment, there may be no recourse to get all of the money back that was put in
• If certain services or goods that were purchased initially are not available in the future, but more expensive versions might be, the family may be forced to pay extra for those items
• In certain insurance funded plans, if the insured dies too soon, there may have been a waiting period in which few or no benefits are paid at death, thus forcing the family to pay out of pocket for the funeral
• Certain unscrupulous providers may have failed to provide an itemized list of services and goods or failed to identify properly, specific services and goods, thus allowing the provider in the future to substitute less expensive items or to leave out services and goods that were originally anticipated in the agreement.

Prepaid Trust Plans for Medicaid Spend Down

Medicaid rules allow someone going through a Medicaid spend down -- in order to have Medicaid pick up all or part of their nursing home bill -- to retain $1,500 for funeral expenses. For many that is not enough. Most states allow potential Medicaid recipients going through spend down to put up to an additional $10,000 or possibly more, with allowances for burial expenses, into an irrevocable funeral and burial plan. Preneed plans are most often used with this spend down provision.

Money must be put into a trust arrangement where the trustee will pay for funeral costs and burial costs after the death of the trust owner -- the purchaser. The trust must be irrevocable meaning the purchaser of the preneed plan has no claim on the money or interest earnings. If insurance is used for funding, the ownership of the policy or the death benefit must be irrevocably assigned to the trust. Some states may not allow insurance to be used in this type of trust. Neither cash value nor the death benefit is available to the family.

Purchasers who have entered into irrevocable funeral and burial trusts may only use the funds for payment of funeral services and merchandise upon the death of the intended funeral recipient.

Any excess in the trust account after payment of funeral expenses might go back to Medicaid or be returned to the local county Social Services Department in which the intended funeral recipient resided, to be earmarked for indigent burials.

Federal law protects the beneficiaries of Medicaid funeral trusts. The law allows the consumer to change funeral homes at any time prior to death without affecting the irrevocability of the arrangements themselves. If such a transfer is desired, a new irrevocable preneed agreement with the newly selected funeral home must be generated. The transfer of irrevocable preneed funds may, however, ONLY be made payable to another funeral home, or another funeral trust program.

Additionally, the law permits the beneficiary's family, at the time of need, to select different goods and services from those originally prearranged. Please note, however, that the funds in the account may only be used for payment of funeral services and merchandise. Any remaining funds in the account after payment of funeral services and merchandise must be remitted by the funeral director to the appropriate trust designated government recipient. The money cannot go back to the family.