What Is a Prepaid Funeral Plan?

Definition & Examples of a Prepaid Funeral Plan

Outdoor shot of funeral
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A prepaid funeral plan isn’t as much a product as it is a preparation strategy. It simply involves taking steps to lay out everything connected to your funeral and prepaying the funeral home.

Learn more about prepaid funeral plans and if they are the right thing for you and your loved ones.

What Is a Prepaid Funeral Plan?

A prepaid funeral plan means prepaying the funeral home for an anticipated funeral in the future. It involves taking steps to lay out everything connected to your funeral, and depending on the wishes of you and your family, costs could include: 

  • A casket or cremation
  • The funeral service
  • The headstone
  • Obituary information
  • Medical care in your final days

How Prepaid Funeral Plans Work

Preplanning your funeral allows your family to put your plan into action with the confidence of knowing that they're acting on your wishes. One place to start is to sit down and create a detailed plan with a funeral provider of your choice. This can include a detailed cost estimate, available locations for services, and any other details you may want to be included.

The documents left with your family should include the contact information of various service providers.

You may not want to make a specific requirement for a service provider unless it is essential for your peace of mind. Not being too specific allows your family to be flexible when executing your wishes.

They might need this flexibility if there are circumstances outside of their control and yours. For example, if the funeral service provider you pay goes out of business before you pass on, your money is gone and your family has to make the arrangements.

Types of Prepaid Funeral Plans

If you and your family decide to go with a prepaid funeral plan, there are several options to consider:

  • Whole-life policy
  • Burial insurance
  • Revocable trust
  • Irrevocable trust

You pay into the whole-life policy like a regular life insurance policy. When you pass, your 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 is a policy that covers the cost of all expenses when you die. The beneficiary can use the death benefit however they choose.

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, or whomever you choose, and the trustee use the funds to pay for your funeral.

An irrevocable trust allows you to prepay your funeral expenses in installments like a revocable trust. Unlike a revocable trust, however, this is a permanent trust that can't be changed by the creator. The trustee is the only person who can make changes to it once it's created.

Criticism of Prepaid Funeral Plans

There are many reasons not to prepay your funeral expenses, including the risks that the funeral home may go out of business or gain a bad reputation over the years. It's also possible that the death benefit from funeral home's insurance policies may be significantly less than the premiums you paid.

If you pass away within the first few years of the policy, there's a chance that the insurance company may not pay any of your funeral expenses.

Alternatives to Prepaid Funeral Plans

Instead of a risky prepayment plan, you could set up a payable on death account. This account is set up through your bank and 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, and the money will gain interest income over time without the fees and complications of insurance policies.

If you want to prepay expenses, one of the best ways to do so is to save the necessary amount of money on your own and ensure it is available to those taking care of the services. If you must prepay through a funeral home, be sure you have written guarantees on refunds, services to be provided, and agreements for the transfer of services to other providers.

Key Takeaways

  • A prepaid funeral plan allows you to plan and pay for your funeral services before your death.
  • There are four types of prepaid funeral plans: whole-life policy, burial insurance, revocable trust, and irrevocable trust.
  • Prepaying for a funeral may lead to a loss of money if the funeral home goes out of business.
  • A payable on death account is an alternative to a prepaid funeral plan.