It may seem only right to prepay your funeral expenses in order to protect your loved ones from the burden of making, and paying for, your end-of-life arrangements. However, there are other options that will achieve your objectives in a more money-savvy way.
A prepaid funeral plan is an arrangement between you and a funeral home where you make an upfront payment to that funeral home today based on an agreement that the funeral home administer funeral services in the future and cover all said funeral costs. Funeral costs tend to run in the neighborhood of $10,000 for a basic service. Although I don't recommend that you prepay your expenses, I do recommend that you do research and find out exactly what your choice of service will involve and then plan accordingly. If you want some extra bells and whistles, be sure to consider those in your cost estimate. You should also be sure to pick a funeral home carefully in order to ensure that the arrangements will go smoothly for your loved ones at a time when any additional stress is unwelcome.
That being said, there are a number of reasons why you should not prepay your funeral expenses, but I'll only cover three big ones.
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1. Your money is better off in the bank: When you stash money in a savings account, it won't earn much interest, but at least it will earn some. More importantly, the bank that you put your funds in is safe and secure, and your deposits are protected by FDIC insurance. You enjoy neither of those assurances when you put your money in a prepaid funeral plan.
While there are some legal guidelines as to how the funeral industry can handle and invest funds prepaid for expenses, your money is safer staying in your bank account earning interest than being in the funeral home's pocket.
2. Funeral homes can go out of business: If the funeral home mismanaged your prepaid funds for whatever reason and was unable to cover agreed upon funeral expenses, you would not have an easy time recovering those funds. Speaking of mismanagement of funds, if your chosen funeral home goes out of business, in most cases there is no guarantee that your funds will be returned to you. Once you make your prepayment to the funeral home, those funds cannot be transferred to another funeral home because the original plan is specific to that funeral home. Worse yet, if they declare bankruptcy, you will be standing in a long line to get your money back and may only receive cents on the dollar, if anything.
3. There is often no provision for relocation: Because prepaid funeral plans cannot be transferred between different funeral homes, coordinating funeral services for those who have relocated would mean that prepaid funds for funeral expenses could be lost if it were decided to have services held elsewhere. This situation can arise when services are held in an area where someone decided to relocate to. Unless explicitly stated within the agreement, there is generally no provision to transfer prepaid funds in the event of relocation. You may think you will never move, but you never know what lies ahead!
Smarter ways to pay in advance
First of all, you should ensure that any existing life insurance policies have the correct beneficiary information -- and that your beneficiaries know they are beneficiaries. You should also discuss your wishes with your beneficiaries so that when the time comes there's no question as to what your wishes are. If you do not have life insurance and can medically qualify, then you may want to consider a small life insurance policy just for these expenses. This may allow you to pay only a small percentage of the funeral cost in premiums. Many funeral homes (but not all) will accept an assignment of your policy, made when your beneficiary arranges your service. An assignment refers to the proceeds, or a portion of the proceeds, from a deceased's insurance policy going directly to the funeral home. This is a good question to ask when you're researching which funeral home to choose, as it could make a big difference if you're using life insurance policy proceeds to fund your service.
If you have the cash in a CD, then earmark that particular CD for this purpose and also be sure that the beneficiary is correct. If your cash is in a brokerage account, then you may want to consider changing the account type to a "transfer on death" or "payable on death" account, also called a Totten Trust, which will allow you to name a beneficiary if you don't have any type of trust that will accomplish the same purpose.
Above all else, this is an important discussion to have with your loved ones. While it's not pleasant, it's a necessity. Be sure to communicate your wishes and consider what your loved ones will have to do to fulfill them. You'll be surprised how liberated you will feel once you've made your final decision.
