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 funeral bill when you die. Average funeral costs are in the thousands of dollars. Generally, this is not something you want your grieving family to worry about.

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. While you're taking care of the arrangements, there are a few other items you should consider as well.

The Prepaid Funeral Plan

A prepaid burial plan isn’t as much a product as it is a preparation strategy. It’s simply taking steps to layout everything connected to your funeral, and prepaying the funeral home. Depending on the wishes of you and your family, costs could include a casket or cremation, the service, the headstone, obituary information, and sometimes even medical care in your final days.

Planning Ahead Is Essential

People may have different opinions on prepaid funeral plans but generally can agree on one action—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. Most people do not plan many funerals or know anything 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 are then free to say goodbye in their own way.

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 included.

The detailed plan with instructions should be left with your family. Various service provider contact information should be also present in the documents left with your family. 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. If the funeral service provider you pay goes out of business before you pass on, your money is gone and they have to make the arrangments.

Types of Prepaid Funeral Plans

Some people elect to not only plan their funeral but prepay it as well. You should be cautious when pre-paying for these services. Funeral directors and service providers are not bad people or businesses, but their situations can change as well. If you want to weigh your options, some types of plans you can get are:

Whole-life policy. 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. 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 (or whomever you choose), also the trustee, uses the funds to pay for your funeral.

Irrevocable trust. An irrevocable trusts allow you to prepay your funeral expenses Much like a revocable trust, you can create a plan that pays directly to the funeral director. Unlike a revocable trust, this is a permanent trust that can't be changed.

Pre-Payment of Your Funeral Expenses

There are many reasons to not pre-pay your funeral expenses. Some considerations are:

  • 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 may be 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 and have services there, it may be tough or even impossible for your family to get a refund.

An Alternative to Prepaid Plans

Instead of a risky prepayment plan, you could 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 complications of insurance policies. 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 pre-pay expenses, one of the best ways to do so is to save the necessary amount of money on your own, then ensure it is available to those who will be taking care of the services.

If you must pre-pay through a funeral home, be sure you have written guarantees on refunds, services to be provided, and agreements for transfer of services to other providers.