Thinking about your funeral, or the funeral of a loved one, may not be the most pleasant thought. But, more and more people today are planning pre-paid funerals. So, why is this? Think of it like just another part of your last will and testament. You want your family and loved ones to be financially secure after your death, and the first thing that tests that security is the cost of your funeral. Make sure your loved ones aren’t left empty-handed after you pass, and make your passing as easy as you possibly can with pre-paid funeral payment options.
Consumer-Arranged Pre-Paid Funeral Options
There are several different options for buying a pre-paid funeral for you or your loved ones. They each have their benefits, and each can be uniquely suited to your family’s needs when the time comes. Here are a few of the more popular options available to you:
Payable on Death (P.O.D.) Account – This has been sometimes deemed a “poor man’s trust.” A P.O.D. account is essentially a regular bank account that you keep and make deposits to, with the sole purpose of saving up for a funeral. All you have to do is visit your bank to designate a beneficiary to your money. After you die, this money will pass probate court entirely, and will go directly to your designee. They can then use the money to pay for your death expenses.
This is not directly a pre-paid funeral payment option, but it works in a similar way. These accounts are easy to open, you don’t have a limit to how much you can deposit into the account, it costs you nothing, and it can be an affordable alternative to paying a lawyer to draw up a living trust. The one drawback is that you cannot designate any alternate beneficiaries.
Insurance – Life insurance is one option that many people consider and make use of when looking toward a pre-paid funeral payment option. Many full-time jobs offer health insurance that includes life insurance, which also designates a beneficiary to your estate when you die. There are two general types of life insurance, detailed below:
Traditional (Whole or Term) – Traditional life insurance is what most people opt into when beginning their full-time jobs or through a federally-funded insurance program. Both whole and term life insurance provide payouts that generally amount to more than the cost of the funeral, which allows a loved one to be more financially secure in the future.
With these choices, you can change your beneficiary with no monetary penalty. However, if the beneficiary claims life insurance early, there may be a penalty; check with your individual plan to make sure. The money does not have to go to funeral expenses. It is given to the beneficiary to spend however s/he chooses.
One drawback of this type of pre-paid funeral payment option is that the payout often takes more time than a P.O.D. account because it has to go through more official channels to get to him/her. In this way, term and whole life insurance should be seen as more of a reimbursement.
Final Expense Insurance – This type of insurance is intended for those who cannot afford whole or term life insurance, or cannot contribute to a P.O.D. account over time. Final expense insurance pays for the costs of the funeral expenses alone. Whereas the average life insurance policy amounts to $250,000-$1,000,000, final expense insurance generally runs more in the range of $5,000-$50,000.
Final expense insurance is also often purchased by those who are close to death or have a terminal illness, and have not already participated in a life insurance plan. Another benefit of this plan is that often no medical exam is needed in order to purchase. This is optimal for those who do not have the money to pay for a full insurance plan, or know their loved ones will be taken care of and simply want to take care of the funeral, so the family doesn’t have to worry about it while they are grieving.
Provider-Arranged Pre-Paid Funeral Options
Then there are also options for funeral services that are arranged by the funeral services itself. Each of these is funded by your money, whether it’s in the form of a trust or insurance. A few of these options are detailed below.
Funeral Pre-Need – A funeral pre-need contract is essentially a price-guaranteed funeral expense option. Your plan is drawn out ahead of time, and you choose what services you wish to obtain after your death. Many people, for instance, opt to choose their own plot or crypt, and even their own casket, in advance.
Because this has become a competitive business in the funeral market, it is possible to obtain all funerary services in one contract. Be careful, however, as they do not have to have the price guarantee. Make sure that your loved ones will not have to foot the extra bill if this is the case. In order to secure a price guarantee, you will have to fund the contract. There are two ways of doing so:
Trust Funded – A funeral trust is another way to set aside money just for funeral costs. You simply need to open up a trust account, which is interest-bearing. When you die, this money is disbursed to the funeral parlor or other funerary service to which you designate the funds. Many funeral homes can help with this process when you are setting up a funeral pre-need account. When the funeral costs are met, any remaining funds will go to your estate, or wherever you designate in your contract.
Insurance Funded – This funding works very similarly, in that the funds are controlled by a third party – in this case the insurance provider instead of the bank – and the party disburses the funds upon your death. You simply have to participate in a life insurance plan that increases in value over the span of your life. Insurance-funded plans can become complicated, however. If, for example, you die early, there may be a long waiting period before the funeral home can receive your money, thus putting the burden back on your family and loved ones.
Pre-paid funeral payment options are great avenues to explore for those who are thinking ahead, have a terminal illness, and/or simply want to protect their loved ones from the pain and stress of dealing with financial burdens of paying for a funeral. This way, you can allow them to grieve and heal without additional anguish. There are benefits and drawbacks of each method of payment. These methods are best used in conjunction with a full life insurance plan, to guarantee your beneficiaries the maximum financial help over time. But, if you are close to death or have few financial resources, these are great options for you.
Updated: March 28, 2014