What Is a Prepaid Funeral Plan?

Create your plan now so loved ones don't need to do it later

Outdoor shot of funeral
••• RubberBall Productions / Getty Images

You’re alive and well, things are going good, and life is going your way. Believe it or not, it might be the perfect time to plan your funeral.

It's not exactly the most pleasant topic, but the last thing you want to do is stick your loved ones with a massive bill when you die. The average funeral costs between $7,000 and $9,000—is that something you want you grieving family to worry about? Of course not.

If you've thought about planning ahead for such an event, you may have thought that perhaps you should prepay funeral costs so that when the event comes, you're covered. But there are a few things you should consider first.

What Is a Prepaid Funeral Plan?

A prepaid burial plan isn’t as much a product as it is a funeral financial strategy. It’s simply taking steps to layout everything connected to your funeral, and then possibly prepaying the funeral home in installments. Depending on your family’s and your wishes, costs could include a casket or cremation, the service, the headstone, obituary information, and sometimes even medical care in your final days. Remember, your funeral will cost many thousands of dollars, so planning now makes sense.

You Must Plan Ahead

Experts have differing opinions on prepaid funeral plans but they all agree on one thing—plan well in advance.

When you pass away, your family will have a lot of decisions to make on top of coping with the loss. The decisions are often complicated financial decisions that the family doesn’t have experience making. How often do they plan funerals? How much do they know about estates and probate?

Preplanning your funeral allows your family to put your plan into action with the confidence of knowing that they’re acting on your wishes. They also have peace of mind knowing that the plan was created through research and cost-effective planning on your part.

Experts advise creating a detailed plan complete with a suggested funeral provider. That might include a detailed cost estimate that stays on file with the family and the funeral home. Alternatively, leave a detailed plan with the family and allow them to speak to funeral homes in the area.

Types of Prepaid Funeral Plans

Some people elect to not only plan their funeral but prepay it as well, though experts encourage caution. If you want to weigh your options, here are the types of plans you can get:

Whole-life policy. The consumer pays into the whole-life policy like a regular life insurance policy. When the person passes, the beneficiary receives the payout to pay for the funeral arrangements. Some states require that the funeral home director be named the beneficiary, while others do not.

Burial insurance. Burial insurance is a policy that covers the cost of all expenses when you die. The beneficiary can use the death benefit however they choose.

Revocable trust. When you set up a revocable trust, you will often sign a contract to pay for your funeral in installments. The funeral director deposits your payments into an interest-bearing account. At the time of your passing, the funeral director, also the trustee, uses the funds to pay for your funeral.

Irrevocable trust. If you’re trying to spend down assets to be eligible for Medicaid, an irrevocable trust allows you to prepay your funeral expenses while also shielding those funds from Medicaid. Much like a revocable trust, you can create a plan that pays directly to the funeral director. If you’re using an irrevocable trust to shield your assets from Medicaid, verify that it’s a legitimate Medicaid-exempt trust.

Should You Prepay Your Funeral Expenses?

Many experts say no, and it's for a number of good reasons.

  • The funeral home may go out of business.
  • The funeral home may gain a bad reputation over the years.
  • The death benefit from the insurance policies offered through funeral homes is almost always significantly less than the premiums you paid.
  • If you pass away within the first few years of the policy, the insurance company may not pay any of your funeral expenses.
  • Sometimes families pay for funeral arrangements at another funeral home, unaware that the person prepaid their expenses somewhere else.
  • If you pass away while traveling or are otherwise away from home, it may be tough or even impossible for your family to get a refund.

    An Alternative to Prepaid Plans

    Instead of a risky prepayment scheme, set up a Payable on Death account. This is an account set up through your bank that allows the designated beneficiaries to receive the money in the account when you pass away. Because it works just like a regular bank account, you can make deposits as often as you would like. The money will gain interest income over time without the fees and complication of insurance policies. Just don’t name a funeral director as a beneficiary.

    If you do nothing else, plan your funeral but don’t pay for it. If you want to prepay expenses, experts advise prepaying by saving the money on your own instead of through a funeral home. If you want to prepay through a funeral home, ask a lot of questions to make sure there’s little chance that your wishes won’t be carried out once you pass.