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Planning for your own passing can be a difficult process. Estate planning is a key part of any comprehensive retirement plan. But it’s easy to overlook the details of your burial and funeral.

Prepaid funeral plans have become a popular option in recent years for people in the retirement planning phase. Not only are the details laid out well before your passing, but you’ve already handled the payment. The idea is that your loved ones have fewer decisions to make while grieving. Unfortunately, the process is rarely that smooth. Prepaid funeral plans often leave bereaved families dealing with extra hassle and costs.

What Are Prepaid Funeral Plans?

A prepaid funeral plan—or pre-need plan—is a set of funeral arrangements offered by funeral homes. You work with a funeral director to make all of the choices involved in your future funeral and burial. The scope can range from basic to detailed, but virtually every plan will include things like a coffin or urn, cremation, burial plot, and funeral services.

If you buy a prepaid funeral plan, you may pay either a lump sum or installments. The details vary by plan, but there are a few common ways of handling payment:

  • Funds can be held in a state-regulated irrevocable trust
  • The funeral home can take out a life insurance policy that will pay out the money upon your passing
  • In some cases, the funeral home can hold some or all of your payment in private accounts

The idea of sparing your loved ones the stress and expense of planning your burial can be appealing. However, prepaid funeral plans have a lot of drawbacks, and regulations vary widely by state.

Questions to Ask Before Buying a Pre-Arranged Funeral Plan

If you do consider a prepaid funeral plan, it’s important to understand all the details involved. A lot can change between the time you purchase a plan and when your loved ones will need to use it. Unfortunately, many prepaid funeral plans lock you in with specific benefits, and there’s little room to make changes without significant extra costs.

Here are some key questions to ask if you’re looking at a plan:

  • Can the plan be altered or canceled if you change your mind? Are you eligible for a full or partial refund?
  • What happens if prices increase between the time you pay and your burial? Does the plan include any extra costs, or will your beneficiaries need to cover the difference?
  • Is an insurance policy included in the plan? If so, what are the terms? For example, is there a waiting period for it to take effect? 
  • What happens if the funeral home goes out of business? Who takes over responsibility for the plan? Will you receive a refund?
  • Does your health (either current or future) affect the terms of the funeral plan?
  • If you move, can the plan be transferred to another funeral home in a different state? If so, what are the costs and steps involved?
  • Some prepaid funeral plans accrue interestif yours does and there’s leftover money, who receives it?

Drawbacks of Prepaid Funeral Plans

While the idea of having everything arranged and paid for sounds great, there are a lot of ways prepaid plans can go wrong. First, prepaid funeral plans rarely allow changes. Whether you want to alter something as simple as flower arrangements or as critical as cremation vs. burial, you might not be able to. And if you decide to move at some point after purchasing a plan, transferring it can be difficult, if not impossible.

Second, prepaid funeral plans often aren’t financially sound. You’re tying up funds that could be invested, used for long-term health care, or allocated for other purposes. Sometimes, the funeral home even earns interest on your money.

Lastly, many prepaid plans are far less comprehensive than they appear. The cost of third-party services—such as cremation, equipment rentals, flowers, or compensation for funeral officiants—isn’t always guaranteed as part of the plan. Excess costs can be passed on to your beneficiaries, giving them an unwelcome surprise at the worst possible time.

Understanding Your Options

Prepaid funeral plans are usually not a sound choice, but preparing for end-of-life needs is still an important part of long-term financial planning. Rather than going with a prepaid funeral, it makes sense to draw up a list of final arrangements:

  • Who to notify when you pass
  • Whether you prefer cremation or burial
  • Where to inter your remains (in the case of cremation)
  • How to pay your final costs, and if you have the funds set aside as part of your trust or will

You can include all of this in your last will and testament, but it’s good to also have them in a separate document that’s easily accessible. Additionally, you can designate an outside party to handle the arrangements on your family’s behalf. This spares family members the effort of dealing with it while they’re grieving, but assures that your wishes are met without the many drawbacks of prepaid funeral plans.

Have you covered all of the important points of retirement planning? Download our free 2021 Essential Retirement Guide to learn more about the process.

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