End-of-Life Planning

Nobody likes to think of their eventual demise and end-of-life planning, but having the proper arrangements and finances in place can be a final act of love for your family.

The need to plan and pay for a funeral can come up suddenly, while settling an estate can take many months. Ensuring you have the financing available to pay for a funeral as well as outlining your final wishes can save your family worry and stress at an already emotional time. However, keep in mind that “preplanning” does not mean the same as prepayment—you can preplan your funeral arrangements and memorial service and not prepay.

How Much Should I Budget?

To prepay your final expenses, you need to know what type of arrangements you want. Funeral expenses can vary greatly. In general, you will pay more for a burial than a cremation. The National Funeral Directors Association reported that the average adult funeral cost $4,265 in 2009. This does not include the cost of a casket or vault, which pushes the cost up to $7,755. Cemetery plots, markers and flowers all cost extra, which can make the total exceed $10,000.

Cremations generally cost less than burials. In fact, the leading reason people choose cremation is to save money, followed by saving land. However, your wishes should dictate your choices. To do that, you should ensure your family has the money needed at the time it’s needed.

Options include the following:

Traditional life insurance

You can use a whole life or term life policy to cover your funeral expenses. You can name a family member as beneficiary, with the understanding that he or she will use proceeds to cover funeral expenses. You will also want to ensure your beneficiary knows your funeral plans. Depending on your age and circumstances, you might opt to pay premiums over time or in a lump sum.

Burial or final expense insurance

A burial insurance policy is simply a form of life insurance that covers burial expenses. Most often a whole life policy, it builds cash value and premiums remain level throughout your life. Burial policies often have lower face values than other life policies, paying from $5,000 to $25,000 on your death; insurers will often write these policies with no medical exams. A final expense policy might have somewhat higher limits, as it’s intended to cover final expenses, including any final medical costs. You may be able to pay for these policies in low weekly or monthly installments.

You can name either a family member or a funeral home as the policy’s beneficiary. For many reasons, though, the latter might not be your wisest financial move. You or your family members might move outside the area; the funeral home could go out of business; your plans/needs might change.

Pre-need insurance

Millions of Americans have entered into contracts with funeral homes to prearrange their funerals and prepay some or all of the expenses involved. Although an individual generally needs a life/health insurance license to sell life insurance, some states allow funeral directors to sell “pre-need plans.” Many of these are a specialized form of life insurance or an annuity that, upon your passing, will pay predetermined expenses of a funeral, cremation or burial. Funeral homes often promote pre-need plans as a way to relieve your loved ones of the duty of planning and paying for your funeral and of locking in current prices.

As with any contract, be sure to read the fine print. Many pre-need plans do not cover all expenses. And since the funeral home is the beneficiary, your heirs lose control of the disposition of funds after your passing.

Read the Fine Print

According to the Federal Trade commission: Laws of individual states govern the prepayment of funeral goods and services; various states have laws to help ensure that these advance payments are available to pay for the funeral products and services when they’re needed. But protections vary widely from state to state, and some state laws offer little or no effective protection. Some state laws require the funeral home or cemetery to place a percentage of the prepayment in a state-regulated trust or to purchase a life insurance policy with the death benefits assigned to the funeral home or cemetery.

The FTC further cautions:

If you’re thinking about prepaying for funeral goods and services, it’s important to consider these issues before putting down any money: What are you are paying for? Are you buying only merchandise, like a casket and vault, or are you purchasing funeral services as well?

• What happens to the money you’ve prepaid? States have different requirements for handling funds paid for prearranged funeral services.
• What happens to the interest income on money that is prepaid and put into a trust account?
• Are you protected if the firm you dealt with goes out of business?
• Can you cancel the contract and get a full refund if you change your mind?
• What happens if you move to a different area or die while away from home? Some prepaid funeral plans can be transferred, but often at an added cost.

Be sure to tell your family about the plans you’ve made. Let them know where the documents are filed. If your family isn’t aware that you’ve made plans, your wishes may not be carried out. And if family members don’t know that you’ve prepaid the funeral costs, they could end up paying for the same arrangements. You may wish to consult an attorney on the best way to ensure that your wishes are followed.

Informal revocable trust account

You can set up this special type of trust fund at a bank. It can also be called an “in trust for,” “payable on death,” “as trustee for” account or a Totten Trust. You choose the beneficiary and deposit any amount you choose; the funds will transfer to the named beneficiary on your death outside of probate. Using life insurance to fund your final expenses has several advantages:

1. Funds are available almost immediately upon presenting proof of death.
2. Generally, life insurance proceeds pass to the beneficiary free of income taxes.
3. You can change the beneficiary during your lifetime if your circumstances change.
4. Buying coverage from a reputable, high-rated carrier provides a high rate of safety.