Before You Pre-Pay Your Funeral – Do the Math!
In a previous blog post titled “Are You a Customer or Commission?”, pre-planned #funeral target marketing was discussed. Specifically, seminars often referred to as “Lunch and Learns” that offered a free meal in exchange for your time and personal information, while a pre-planning specialist (often from out of town or employed by a third party) places emphasis on pre-paying for your funeral while you are younger, possibly employed, and in good health.
One of the primary points of the presentation and sales pitch revolves around time #payments, inflation, and placing a financial burden on your family. Let’s face it, Celebrations of Life can be expensive. As we age, it’s not uncommon to contemplate the #cost for our funeral. Rarely does a person specifically set aside money for their funeral expenses.
It’s also important to note that if an individual is currently living on disability, social security, or even a veteran who was honorably discharged, the next of kin will incur costs. This also includes cases where the deceased does qualify for some financial assistance.
For the reasons mentioned above, along with a vast majority of the population who are both retired and living on a fixed income, the funeral home pre-planning specialist will promote a funeral insurance payment plan. In fact, to keep the payment small, a ten or even twenty-year payment plan option is presented.
The benefits pitched are:
- Depending on what state you live in, after a two-year period, should death occur, the full amount of the pre-planned funeral is paid in full as long as your policy is in good standing.
- Some states offer a graded death benefit should death occur prior to pay. This means all premiums plus interest will be returned.
- Small affordable monthly payments.
- The cost of the pre-paid funeral plan is locked in at today’s prices.
- Payment is directly assigned to the funeral home.
- May be transferable to another funeral home.
- Emotional peace of mind.
- Exempt as an asset for Medicaid.
- Those you leave behind don’t have the financial burden of paying for a funeral.
What no one explains to you:
It’s a math problem! There are so many variables that you must look beyond the initial payment.
Case in point: * Below are actual rates from a preneed funeral insurance company who conducts business in the Midwest. The rates and payment vary based on the state, age, health status, etc. This is based on a 70-year-old healthy individual.
- The average funeral cost across the United States in 2023 is $8,107.
- The average age a person pre-plans a funeral is 70.
- Life expectancy of a healthy 70-year-old is 14.7 years.
- Inflate rate 3.70% based on 2023.
If you prefer to not pay your pre-paid funeral in full via a single premium, and would rather pay overtime, this is what it looks like.
Below you will find the monthly payment options estimated for a $8,107.00 funeral.
As you can see, should you live to be 90, you will have more than doubled the original amount of the funeral. Remember, all the numbers can vary, however I’m sure you get the point.
To be fair:
When insurance is purchased, there are embedded costs for the risk the insurance company is taking on. Think about it – funeral insurance is being purchased at an older age in life. The main risk factors are age, health, and average life expectancy with this type of insurance. Amplifying the risk factors by incorporating both the commission for an insurance agent and the overall cost of doing business can result in a rapid accumulation of #expenses.
Insurance companies like time payments.
In the big picture it helps them with cash flow and budgeting. Smaller payments usually mean happy agents. After all, it’s easier to sell a small monthly premium than one large sum. Regarding commissions, some companies will provide an incentive for time #payments.
Other downsides of funeral insurance time payments:
- In some states, should you move, you can’t change your mind. For example, in Florida, should you prepay a funeral, it can only be used at a funeral home in Florida.
- It’s not transferable to another person. In other words, you cannot gift the funeral insurance policy to your spouse or family member should they precede you in death.
- Often times people will want to pay off early for a savings benefit. While intentions are good, it’s not uncommon to miss the window of opportunity to do so, where it is the same as the one lump sum initially presented.
Still prefer making time payments? There is another way!
Ask about a “Funeral Trust” rather than “Funeral Insurance”
Long before there was funeral insurance there were funeral trusts. In a nutshell, a funeral trust is a contract between you and the funeral home, where the money is invested in a third-party fiduciary. Each state has their own rules, however for purposes of conversation, just think of it as a bank specifically for preserving funeral funds.
The beautiful thing about a funeral trust is that the pre-planning specialist and you can set up a payment structure, with or without interest (again, state rules). The only major catch is that should you die before the end of the payments, the balance will still need to be paid.
At our family funeral home, we have chosen to use a funeral trust as our pre-planning funding vehicle. We chose it for its ease of explanation, complete transparency, and customer flexibility.
In closing, there are only two real benefits of pre-paying for your funeral vs. pre-planning.
- A pre-paid funeral contract is considered exempt as an asset when attempting to qualify for Medicaid. It’s important to know your state’s contract limits. This is a great way to protect your money and set aside money for your funeral, your spouses, and if done correctly, your children. *Note – this can disqualify you if not written up correctly. It may be wise to consult your attorney.
- To genuinely provide you and your family the peace of mind knowing that it’s paid for and there is a plan to follow that you selected.
Be sure to check out Episode 12, Looking to Pre-Pay Your Funeral – Do the Math, of my podcast, I Woke Up Dead…Now What?, to learn more!