Photo: Flickr user Stephan Ridgway.

If you consider what a typical funeral costs (up to $10,000 in many cases), you might find yourself tempted by "pre-need" funeral insurance, or a "pre-need arrangement," as it's sometimes called. This insurance, typically sold by a funeral home, lets you make your own funeral plans and then pay for them ahead of time. It may sound good, but there are many reasons to steer clear of it, such as the fact that it generally isn't transferable from one funeral home to another and that your loved ones may still end up having to pay some additional costs. Still, if you really think it might be worth it for you, be sure to find the right kind of plan.

Here are some tips:

  • Know that pre-need insurance is regulated differently in different states, and New York state doesn't even permit it.
  • Read all the fine print on whatever you sign. You don't want your loved ones to end up unpleasantly surprised that some service or product, such as a viewing, isn't covered
  • Find out what happens if the establishment selling the arrangement goes out of business. For example, do you get your money back? With interest?
  • Get details on your ability to cancel the policy.
  • Learn exactly what you're buying with your money. Know what's covered and what isn't -- e.g., funeral services, a casket, a vault, embalming, etc. Get an itemized list, with prices broken out. Keep the information in a safe place where you'll be able to find it when the time comes.
  • Compare the price quoted with those provided by other companies. A big benefit of pre-planning is that you can shop around with a clear head -- not when you're blinded by grief after the death of a loved one.
  • Ask where exactly the money will be kept. In a trust? In the third drawer from the bottom of a filing cabinet? Ask for the name of the bank or insurance company serving as the trustee. You want one with a strong rating and reputation, as banks and insurance companies can fail (as can the funeral home that sells you the coverage). 
  • Don't make any decision hastily. If a salesperson is using any high-pressure tactics, walk away.
  • Take one or more friends or family members with you when you talk to a salesperson.
  • Don't think of pre-need arrangements as investments. They're conveniences. If you're looking for an investment, you can do much better elsewhere.

Photo: Flickr user David Hilowitz.

As an alternative, you might look into a pre-need trust, which offers some advantages over pre-need insurance, such as portability. But it has downsides, too: It's rarely used and is unfamiliar to many in the death services industry, and it could cause headaches for survivors if its information is out of date. Some nursing homes and similar facilities require that residents have irrevocable funeral trusts (which can help someone qualify for Medicaid).

You might also look into funeral or burial (or "final expense"), insurance, which is a form of life insurance. It typically costs a modest sum -- enough to cover funeral expenses -- and has the expectation (but no guarantee) that the beneficiary will pay the expenses with the proceeds. These policies are typically sold by insurance companies, while pre-need plans are typically sold by funeral homes.

A better move can be to simply take the money you'd spend on pre-need arrangements and park it in a special separate fund for the purpose of covering death expenses. You could invest that money in certificates of deposit or money market funds, and you might fare better than you would through the pre-need plan. Such an account might even carry a pay-on-death designation, giving the money to a designated recipient upon your demise.

Keep in mind, too, that you may be able to do some pre-planning (but not pre-paying) with a funeral home so that it has your preferences on record. That can be very handy for loved ones when the time comes.

Discuss funeral preferences with family members. Photo: Flickr user Zoetnet.

First steps
Before you buy any pre-need insurance, be sure to research the topic and to discuss your thinking and decision with loved ones.

Before that, though, whether you opt for pre-need insurance or not, discuss funeral thoughts and preferences with your family members. It can be extremely useful, and can ultimately save not only dollars but also stress and anguish, if everyone in the family makes clear what kind of send-off they'd like.

Without such a discussion (which, ideally, ends with preferences written down and stored in a safe place), you might, out of a sense of love or obligation, choose a fancy casket for a deceased family member, not realizing that he or she would have preferred a simple pine box or cremation. A simple discussion can keep guilt, and even sales pressure, at bay.