Dear Savvy Senior: My wife and I have been thinking about pre-planning our funerals now so our kids won’t have to later, but we would like to find out whether it’s a good idea to prepay. What can you tell us? — Living on a Budget
Dear Living: Planning your funerals in advance is definitely a smart move. Not only does it give you and your wife time to make a thoughtful decision on the type of service you want; it also allows you to shop around to find a good funeral provider, and it will spare your family members the burden of making these decisions at an emotional time.
But pre-planning a funeral doesn’t mean you have to prepay, too. In fact, the Funeral Consumer Alliance, a national nonprofit funeral consumer protection organization, doesn’t recommend it unless you need to spend down your financial resources so you can qualify for Medicaid. Here’s what you should know.
Most funeral homes today offer what are known as “pre-need plans,” which allow you to prearrange for the type of funeral services you want and prepay with a lump sum or through installments. The funeral home either puts your money in a trust fund with the payout triggered by your death or buys an insurance policy naming itself as the beneficiary.
If you’re interested in this route, make sure you’re being guaranteed the services you specify at the contracted price. Some contracts call for additional payments for final expense funding, which means that if the funeral home’s charges increase between the time you sign up and the time you sign off, somebody will have to pay the difference. Here are some additional questions you should ask before committing:
>> Can you cancel the contract and get a full refund if you change your mind?
>> Will your money earn interest? If so, how much? Who gets it?
>> If there is an insurance policy involved, is there a waiting period before it takes effect? How long?
>> Are the prices locked in, or will an additional payment be required at the time of death?
>> Are you protected if the funeral home goes out of business or if it’s bought out by another company?
>> What happens if you move? Can the plan be transferred to another funeral home in a different state?
>> If there’s money left over after your funeral, will your heirs get it or does the home keep it?
If you decide to prepay, be sure to get all the details of the agreement in writing and give copies to your family so they know what’s expected. If your family isn’t aware that you’ve made plans, your wishes might not be carried out. And if family members don’t know that you’ve prepaid the funeral costs, they could end up paying for the same arrangements.
Other payment options
While prepaying your funerals might seem like a convenient way to go, from a financial point of view, there are better options available.
For example, if you have a life insurance policy, many policies will pay a lump sum when you die to your beneficiaries to be used for your funeral expenses. The payment is made soon after you die and doesn’t have to go through probate.
Or you could set up a payable-on-death account at your bank or credit union, naming the person you want to handle your arrangements as the beneficiary. POD accounts also are called Totten Trusts. With this type of account, you maintain control of your money, so you can tap the funds in an emergency, collect the interest and change the beneficiary. When you die, your beneficiary collects the balance without the delay of probate.
Jim Miller is a contributor to NBC-TV’s “Today” program and author of “The Savvy Senior.” Send your questions to Savvy Senior, P.O. Box 5443, Norman, OK 73070; or visit savvysenior.org.