Low Cost Funerals

Need a way to finance a funeral? Today, the cost of dying is at an all-time high and increasing daily. Currently, average funeral costs are over $7,000. This places a huge burden on many families when faced with burying a loved one. But, fortunately, there are a number of options available to creating low cost funerals. These options include pre-need insurance policies, bank or funeral trusts, life insurance, annuities, and savings accounts.

Low Cost Funerals: Pre-Need Insurance Policies

Pre-need plans are designed by individuals who want specific funeral arrangements and the assurance that those arrangements will be honored. Pre-need policies are sold by the funeral home director, with the funeral home being the policy beneficiary. The funeral director receives a commission, like any agent, for selling you the policy.

The funeral director discusses the services and calculates the total cost (which includes a casket and selected services such as embalming, visitation, transportation, etc.), and you pay in advance, locking in "today's price." The funds are then deposited in a bank that's federally insured, a requirement of the Federal Trade Commission, to protect the family if the funeral home goes out of business.

Pre-need policies can be paid in one lump sum or over time. Funeral directors who are agents for pre-need insurance may only offer policies underwritten by a single company. You won't be able to "comparison shop" for price; you'll either have to accept the rate of the policy or decline it. And while this type of planning blocks the funeral home from "coming back and asking the family for more money", there have been instances of prepaid funds being mishandled. Which is why, another way to fund pre-need is thru insurance underwritten by a company recommended by the funeral home.

When pre-need insurance is written by a company, you purchase insurance in the amount needed to cover funeral expenses, as guaranteed by the funeral home. When death occurs, the money is paid out to the funeral home. With this type of arrangement, you pay a monthly premium based on age, and the money grows with the rate of inflation. Any remaining moneys that is left after the policy is paid goes to a designated beneficiary.

With pre-need insurance, it is important to make certain the total cost of the funeral is guaranteed and, if you should move, that the goods and services selected are transferable? For example, you've picked out a funeral home and made pre-arrangements which total $13,500. If the funeral home offers pre-need insurance, you purchase a policy for $13,500. But, without a price guarantee, the actual price at the time of need could be $14,500. Your family would need to pay the extra $1,000 to carry out your wishes. Or, you've changed your mind and want to move the arrangements to a different funeral home - would you be able to do so without losing any money?

Overall, having a pre-need insurance policy is economically sound and places less burden on the family at the time of need. The funeral director handles the claim, receives the money, and carries out your wishes. "Insurance is king," says Chuck Wetmore of American Funeral & Cemetery Trust Services in Oregon, which helps administer pre-need trusts around the country, including the California Master Trust. Wetmore estimates that about 80 percent of pre-paid funerals are funded by insurance.

It is important to note that pre-need insurance laws vary by state and New York does not allow the sale of pre-need insurance at all. So be sure to check with your policy holder before committing to any pre-need insurance for a low cost funeral.

Pre-Need Insurance vs. Trusts

In Wetmore's opinion, "Trusts are better for the family and the funeral director."  When weighing the options to fund your low cost funeral, consider these points:

• Ask for a guaranteed price plan no matter how you decide to fund your funeral.
• For items and services that cannot be price-guaranteed, ask for a written estimate of the cost so your family will know what to expect.
• You may be declined for insurance due to age or health.
• While, a funeral director may offer both pre-need insurance and trust services, you can't "comparison shop" for rates and your pre-pay options may be limited by what is offered. The funeral director chooses your insurer, you only select the face amount
• The funeral home director receives a commission for selling pre-need policies, therefore they may have financial incentives for selling policies for one company.
• If you use a pre-need trust, make sure your contract includes a cancellation clause. Some states may allow a "revocation fee" to be charged.
• In some States, if your money is held in a trust, family members may be able to strip down funeral service arrangements to receive more cash back.
• Know where your trust money is being invested; you should receive an annual statement of earnings and may be required to report the interest income on your taxes.
• If you receive social services before your death, your family may not receive any remaining trust money paid after the cost of the funeral; any remaining monies would have to be returned to the State.
• If you're buying a pre-need policy, find out if you will pay more in premiums than your beneficiaries will receive in actual benefits.
• Find out if your low cost funeral pre-paid arrangements can be moved to another funeral home.

Low Cost Funerals: Bank or Funeral Trust

With bank or funeral trusts also known as pre-need trusts, the funeral pre-arrangements are made with a funeral director, who opens a trust fund account in your name at a Bank to fund these arrangements. The account is designated as POD (Pay on Death). Or you may create the trust fund account directly with the bank, designating the funeral home as the beneficiary. Similar to a savings plan, any earnings from the fund are taxed each year, and can be paid either by you or the trust itself.

A pre-need trust allows monies to be deposited into a federally insured bank until your death and monies dispersed to the funeral director. Depending upon the State in which the trust is established, the money may be put into an individual trust account or a "master" trust, which pools many individual trusts. The value of the trust can rise and fall depending on the investment performance. However, if you have a guaranteed-price contract with the funeral director, he takes on the market risk from the trust and must provide the services you selected no matter how the trust's investments perform. If you do not have a guaranteed-price contract, and the fund is invested in risky stocks and bonds, consider purchasing an insurance policy as added protection. But overall, make certain your money is wisely invested and/or that the funeral home is working through a reputable, financially sound Bank.

If trust fund investments have done well, there will be "overage" between the trust value and the cost of the funeral. What happens at this point varies by region. Some funeral directors will pocket the difference, while some States, like in New York, obligate funeral homes to return any remaining money to the family.

Many states also allow funeral directors to keep a portion of trust payments. For example, Washington allows a funeral director to keep 10 percent of the trust, Nebraska allows 15 percent and Colorado allows 25 percent of the amount of the trust fund. California does not allow any percentage to be retained by funeral directors. But, no matter what amount of a trust fund a funeral director is allowed to retain, pre-need trusts are revocable.* If, at any time, you change your mind, you can withdraw your funds and receive all of the money you have deposited.

Note: *If you need to spend down your assets in order to qualify for such social services such as Medicaid, you will need to put your pre-paid funeral money into an irrevocable trust. This removes the trust fund from your assets, but cannot be withdrawn until death.

Similar to pre-need insurance, before you establish a bank or funeral trust, make certain you have a price guarantee on your funeral selections. This will ensure that the money placed into a trust today will cover the full cost of the funeral expenses in the future.

Pre-Need Insurance vs. Trusts

In Wetmore's opinion, "Trusts are better for the family and the funeral director." When weighing the options to fund your low cost funeral, consider these points:

• Ask for a guaranteed price plan no matter how you decide to fund your funeral.
• For items and services that cannot be price-guaranteed, ask for a written estimate of the cost so your family will know what to expect.
• You may be declined for insurance due to age or health.
• While, a funeral director may offer both pre-need insurance and trust services, you can't "comparison shop" for rates and your pre-pay options may be limited by what is offered. The funeral director chooses your insurer, you only select the face amount
• The funeral home director receives a commission for selling pre-need policies, therefore they may have financial incentives for selling policies for one company.
• If you use a pre-need trust, make sure your contract includes a cancellation clause. Some states may allow a "revocation fee" to be charged.
• In some States, if your money is held in a trust, family members may be able to strip down funeral service arrangements to receive more cash back.
• Know where your trust money is being invested; you should receive an annual statement of earnings and may be required to report the interest income on your taxes.
• If you receive social services before your death, your family may not receive any remaining trust money paid after the cost of the funeral; any remaining monies would have to be returned to the State.
• If you're buying a pre-need policy, find out if you will pay more in premiums than your beneficiaries will receive in actual benefits.
• Find out if your low cost funeral pre-paid arrangements can be moved to another funeral home.

Low Cost Funerals: Life Insurance

A traditional life insurance policy is designed to meet several life events: paying off loans, funding educational costs and providing for everyday living expenses. For many, life insurance is also a death protection benefit for families. When the head of household dies, the survivors get the money to help the household. But, life insurance is also used to pay burial expenses.

Many people purchase life insurance specifically to cover burial costs. The premiums are normally very affordable - payable in small monthly installments and the policy does not need to be reported on a 1099 since it's not considered taxable income.

With burial insurance, you name a beneficiary who would claim and receive the money upon your death. That beneficiary would then be responsible for using the money to carry out your wishes. (Legally, the beneficiary could use the money any way they want, so make certain to designate a beneficiary that you trust.) If the amount of insurance exceeds the cost of the funeral, the beneficiary keeps the difference. For example, if you have a burial insurance policy for $20,000 and your services and burial end up costing $15,000, your beneficiary would pay the bill and keep the extra $5,000.

Burial insurance policies can be "term life" (covers an individual for a specific period or time or a certain age, then expire) or "whole life" (which covers you for the rest of your life). They can be "simplified issue" policies, for which you're asked several medical questions but don't have to take a medical exam, or "guaranteed issue," where the policy is issued to anyone who applies with no medical questions asked.

Note: People who have a serious health problem may receive a policy with a "graded death benefit," which means the coverage amount increases over time and the beneficiaries won't receive the full face value if death occurs within the first few years of the policy.

For the purposes of paying for a low cost funeral, some people choose renewable term life insurance. Renewable term life insurance provides the most death-benefit protection. It is less expensive than whole life insurance and carries a fixed death benefit, such as $5,000 to $50,0000. Renewal term insurance can be purchased for one, five or ten years. The only drawback is if the policy is not renewed, it lapses and disappears.

Any life insurance policy can be used to pay for a low cost funeral. You can purchase term or whole life insurance and instruct your beneficiary on how to use the benefits. Standard term and whole life policies, however, aren't offered in low face amounts like $5,000, which is why policies specific to low cost burials can be handy if you need money to only cover those expenses. But, if you have other financial obligations, such as a mortgage and dependents, a standard term life or whole life policy in an amount that can cover a number of family events, including low cost funerals may be a better option.

Low Cost Funerals: Annuities

An annuity is purchased through an insurance company for a specified amount and for a number of years. The money you pay in regular intervals (monthly, quarterly), over a period of time is invested. Ideally, interest is earned over time, increasing the amount of money available for a low cost funeral.

Annuities are sometimes called life insurance in reverse. It is said that while life insurance protects the purchaser from dying too soon, an annuity protects against living too long. When an annuity is paid up, money is paid to you, not your estate or beneficiary.

Both life insurance and annuities have an investment element and a significant cash surrender value. But some annuities may not be suitable to your circumstance, so check with companies who specialize in annuities such as Aetna Life & Annuity, Prudential Insurance and Equitable Life Assurance.

Low Cost Funerals: Savings Accounts

Savings accounts allow you to make provisions for your family members to withdraw funds at death to pay low cost funeral expenses.

"Anything that is put aside for funeral expenses is good," says Darryl Dick of Gilligan's Funeral Home in Cincinnati, Ohio. But, one of the drawback with savings is that people aren't disciplined enough and because these savings are not specifically for low cost funeral expenses, there's that big temptation to draw from them for emergencies, and/or to forget to make regular payments. Also, a long term illness can easily deplete short-term savings, while taxes, (you need to report it on a 1099), and early withdrawal penalties can reduce the savings amount. By the time the need comes, there maybe not very little money in the account to pay for a low cost funeral.