Funeral Insurance, Funeral Trusts, and Funeral Agreements
When you die, funeral decisions and payments come first and fast. Will these issues be handled by you now or by your loved ones after you pass? And, where will the money come from? Many seniors are making their funeral insurance decisions and payments now to minimize the stress and anxiety it may cause their loved ones. Let’s look at some prepayment options and benefits.
Your options for prepaying the cost of your funeral are three:
- Buy funeral insurance
- Make a prepaid agreement with your funeral home’s director
- Set up a funeral trust
You might consider buying a small term life insurance policy to cover burial expenses, in effect, burial insurance. if you think it might be difficult to pay the $5,000 to $20,000 cost of a funeral. Funeral insurance is insurance intended to cover the cost of burial expenses. It usually has a low face value, normally less than $20,000. The value of the policy is determined by the anticipated total funeral expenses at the time of death, although some final expenses, such as cemetery property, can be prepaid and need not necessarily be included in the policy.
Prepaid funeral agreement
You arrange with the director of your funeral home of choice to prepay your funeral costs. You’ll get to pick out just what items you wish to pay for and for how much. Be sure when the agreement is signed by both you and the director that you have a clear statement of the funeral goods and services you’re prepaying. Your prepayment should specify where your money is deposited – either in an interest-bearing trust account or a funeral insurance policy with either designated in your name.
Set up a funeral trust
This can be simple legal document, similar to what many funeral homes use when having an individual pre-pay for services. A key selling point behind the trusts is the fear that your funeral home may go out of business. Another is that the trust provides flexibility in picking a service provider, so that the family is not locked into using a certain funeral home.
Funeral insurance and funeral arrangements impact on Medicaid benefits
A key issue behind funeral planning is the need for long-term medical care and the desire to shield some assets from nursing homes or Medicaid. Not only is there a way for an individual to set aside money for a funeral, but money used for that purpose "beats the clock". i.e., where most assets must be moved out of an individual's name and/or accounts well in advance of needing long-term care, funeral money can come out on the eve of moving into the nursing home and just before needing Medicaid.
Financial Benefits of Pre-Paying Your Final Expenses
The average funeral can range from $5,000 to $20,000 depending on what state you live in; and this is not taking into account a burial plot or memorial service, if so desired. According to the Federal Trade Commission, many funerals run well over $10,000. By pre-planning and pre-paying your own final expenses, not only do you insure that your wishes are met, but you also remove the temptation of the “impulse buy” from your survivors. Additionally, there is often a substantial delay in probating even the most basic will, and cash can be tight for a while. Not having the final expenses to worry about can remove a large financial burden from your family at a time they may be least able to afford it.
An additional thing to consider is the impact that the potential tax-benefit prepaying your final expenses can have for your survivors. Every dollar you leave your loved ones is, in many cases, subject to estate taxes, which can be significantly higher than regular income taxes. By spending the money for your funeral expenses while you are still alive, this money is no longer subject to the higher estate taxes your survivors would pay on it when you pass away.
Many people choose to use an estate planning attorney's help, or a financial advisor’s help, in creating a document that will prearrange a funeral and prepay some or all of the expenses involved. Different states have different laws governing prepayment arrangements. Some states have laws in place that ensure that the advance payments are properly applied, while other states offer little or no protection. Talk to your attorney regarding the protection your state requires, and consider the following list of things to think about before entering into a prepayment arrangement.
Before you make funeral arrangements, investigate that the firm has a reputation for integrity and reliability.
If you are buying only merchandise, such as a casket and burial vault, the price will be less than if you are also buying funeral services. However, many people find it easiest to take care of all of their merchandise and service needs at once.
Some states require that advanced funds be segregated and held in a trust until your death, while other states offer little or no protection.
If you make arrangements at a younger age, the interest income on the prepaid funeral arrangement trust account could be substantial.
Confirm that your prepaid funeral service contract will be protected in the event the firm goes bankrupt.
Be sure that you can cancel your contract and receive a full or partial refund if you change your mind.
If you move to a different state or die while away from home, your prepaid funeral arrangements can be transferred, but often at an added cost.
According to the Federal Trade Commission's Funeral Rule, please be aware of the following:
- You have the right to choose the funeral goods and services you want (with exceptions).
- The funeral provider must state this right in writing on the general price list.
- If state or local law requires you to buy any particular item, the funeral provider must disclose it in the price list, with a reference to the specific law.
- The funeral provider may not refuse, or charge a fee, to handle a casket you bought elsewhere.
- A funeral provider that offers cremations must make alternative containers available.
Prepaying your final expenses is just one of many ways you might consider to ease the burden on your loved ones after you are gone. Shop around for the best deal, and do not assume that all funeral homes are the same. Just like any other investment, you will want to get the best value for your money. Consult your Financial Advisor and your Estate Planner to help you review and revise your decision every few years./pThe funeral provider must state this right in writing on the general price list.