I was recently asked by several followers on Twitter whether I think pre-paid contracts to purchase funeral, burial, cremation, and the products and services that go with them is a good idea.
I’ve been doing a lot of research to make sure I could give an honest and informed answer. As I dug further into this I began to realize that the theory is excellent but the practice is flawed. There were just too many prominent cases of fraud in too many different states for me to feel comfortable recommending doing this.
In theory, you select a package of the services and products (i.e., casket) you want and pay a fee now which would cover the costs of this package if you died today.
The money is then put in a trust account where it is invested and in theory is protected and increases in value. The increase in value should offset any increase in the future value of these services and products. You lock in what you want at today’s costs and the Funeral Home locks in future business now. These plans are sold by Funeral Directors licensed to be agents for companies that hold and manage the trust funds. Think of this as being similar to the agent who sold you your life insurance policy. The principal company, that the Funeral Director is the agent of, gets to manage the funds and gets a cut as a management fee. Sounds fairly straightforward and simple; and it should be. It is, however, plagued by some very high profile cases of fraud. Now please realize that just like Bernie Madoff stole billions of dollars from investors these things can also happen in pre-paid funeral plans. And, just like you should not stop investing in stocks because of the Madoff fraud there is not overriding reason to stop buying pre-paid funeral plans.
I am concerned however that the premise of pay now and receive later, possibly much later, has some flaws in it. For example, the money in the trust fund should increase in value at a reasonable rate to cover increased costs. But what if it doesn’t? What if the cost of the casket you put into your contract goes up significantly because of a shortage of wood due to a construction boom. Or, what if the metal it is made out of is in short supply because it is needed for an international growth spurt in various products? What if the Funeral Director forgets or neglects to hand your money over to the company for which it is an agent so the funds are never invested (and he/she keeps the funds)? What if you have chosen a casket with a particular material or specification and the Funeral home tells you it can not provide that and you refuse to take a different casket because you feel it is of inferior quality and that voids your pre-paid contract?
All of these things can happen and have happened. You see, the funeral home is in the business to make money and can not afford to take a loss on a customer. So the possibility exists that numerous things can go wrong that could cause a problem with your pre-paid funeral arrangement contract. An additional consideration is: if you move will the contract allow you to be buried in another state with equivalent services and products for the same amount of the contract or will any change in location cause your contract to be revised or voided? A press release from the NY State Funeral Directors Assn has an explanation of the pre-need plans their members sell. I think this is great info but may not be enough to protect consumers. Looking in the recent past to info provided by the Attorney General of Missouri we can see a myriad of problems that led to investigations and prosecutions. Unfortunately, similar situations have occurred in Ohio as recently as December 2008. In Texas in 2008 some of the pre-need providers backing these contracts were deemed to insolvent. I realize that these are probably the exceptions and that most Funeral Directors who sell pre-need programs are honest and well meaning people. I just want everyone to be aware of what can happen if you don’t fully investigate the people you are dealing with and then investigate again after you have given them any money.
Another option that you might consider to help pay for funeral expenses is to buy additional term life insurance. It’s relative cheap and if you get between $10,000 and $15,000 worth of term life you should have the entire cost covered with extra left over. The only major drawback to this is that most term life policies terminate at age 70 or 75 so if you outlive your policy you won’t have the money to cover the funeral costs.
None of this is meant to be legal advice. Your lawyer may request that you set up a trust and move assets into it to cover any future funeral costs or, he/she may have some other better advice.
Good luck and if you have any questions, comments or suggestions that will help others please let us know.