Pre-need Funeral Plan Basics

What will happen if a prepaid funeral plan hasn’t been paid in full at the time of death depends on the circumstances and the type of plan. If the purchaser of the plan opted for a fully-insured policy, full death benefits will usually be provided even if the plan was not paid in full. However, these plans can be contested within two years of the plan’s purchase and the provision of benefits can be denied if the death was due to suicide or if fraudulent information was provided on the application. 

Another possibility is that the family of the person who died may be required to cover the remaining balance since there were n’ot enough funds in the prepaid plan to cover the cost of selected services. Depending on how much money was already deposited into the plan, it may be challenging for loved ones to cover the remaining expenses. Sometimes the funeral home or crematory will provide the family with the option to downgrade goods or services in an effort to reduce the unpaid balance. It may also be possible to work with the funeral provider to establish a payment plan or determine financing options. 

Sources

“10 Questions to Ask Before You Prepay Your Funeral”. Funeral Basics. https://www.funeralbasics.org/10-questions-ask-before-prepay-funeral/ 

If the total funeral costs are less than the amount deposited into a prepaid funeral plan, what happens to the remaining money is based on the terms and conditions of the preneed contract. It can also vary depending on the type of prepaid funeral plan selected. If the funds in a prepaid plan are distributed to the funeral home responsible for providing the goods and services, the funeral home will follow its refund policies. Sometimes, the next of kin can reallocate the remaining funds to additional services or expenses, such as upgrading floral arrangements or the casket. 

Some funeral homes have prepaid plans that allow a refund of all excess funds, which can help cover other expenses. However, refunds are not guaranteed and can vary depending on the plan and provider, so this is not an ideal option to ensure financial coverage of any additional expenses aside from the funeral. When refunds are allowed, they are typically paid out to the estate of the person who died, the purchaser of the prepaid plan, or a beneficiary. 

The state where the funeral provider is located may also have laws about preneed plans. For example, whether a refund is possible can depend on whether the state deems the prepaid plan revocable or irrevocable. Additionally, some plans that include refunds may include administrative fees or other charges that may reduce the total amount refunded to the estate, beneficiary, or purchaser.

Funeral expenses often exhaust most of the funds in a prepaid plan. However, you should carefully review the terms and conditions of the program to understand your options regarding excess funds. 

Sources

“How Does A Prepaid Funeral Plan Work?” Titan Casket. https://titancasket.com/blogs/funeral-guides-and-more/how-does-a-prepaid-funeral-plan-work 

“Complete Guide to Prepaid Funerals: Plan, Costs, Pros & Cons”. Lincoln Heritage Funeral Advantage. https://www.lhlic.com/consumer-resources/how-pre-paid-funeral-plans-work/ 

The laws around preneed agreements are written by the states and vary widely from state to state. Thus, legal protections vary a great deal as well. There are no minimum federal standards as to what a preneed contract should include, and the federal government does not require full disclosure of preneed contract terms, explains AARP. These issues may be addressed when the Federal Trade Commission updates its funeral guidance, which many stakeholders hope happens soon. The agency began reviewing the Funeral Rule in early 2020 and requested comments from interested parties, including service providers, consumers and advocacy groups, at that time. The comment period is over as of this writing, but no new rules have been issued as yet.

On a state level, a few states have established “recovery funds” to compensate consumers who are defrauded by a funeral home. These states require that sellers of preneed services pay a per-agreement fee, which is based on the value of the contract. The state deposits the fees in the recovery fund and uses it to defray the consumer’s loss if a seller reneges on the contract and is unable to provide a refund (for example, if the funeral home is in bankruptcy). Sadly, these recovery funds are not the norm. 

Additionally, some states specify that a funeral service provider must provide a refund of some portion of the money paid if the consumer cancels, regardless of the reason why. In Ohio, for example, the funeral home must provide the following: 

• A seven-day “cooling off” period during which the consumer can cancel the contract and receive a 100% refund
• A 90% refund of money paid on a preneed funeral services contract if the consumer changes their mind after seven days
• A 60% refund of the amount paid for a cemetery contract
• 80% of the interest earned on either a preneed cemetery contract or funeral service contract

But, again, each state has its own laws, and most states offer little protection at all. 

Sources 

“The Ultimate Guide to Estate Planning”. AARP. https://www.aarp.org/money/retirement/the-ultimate-guide-to-estate-planning/ 

“Pre-Need Funeral Contracts”. Elder Law Answers. https://attorney.elderlawanswers.com/pre-need-funeral-contracts-3337 

Although preneed funeral plans can be risky investments, there are nevertheless some benefits to paying for your funeral or burial services in advance. For example, knowing that your funeral is arranged and paid for can alleviate concerns over whether your choices around final disposition will be carried out after your death. Additionally, many people find comfort in the knowledge that their surviving loved ones will not be left with the financial burden of paying for their funeral, burial or cremation after they die. 

Another very practical reason to prepay for a funeral is that doing so allows you to lock in the cost of the goods and services you buy (if the prices are guaranteed). However, it’s important to remember that some goods and services associated with your funeral will be purchased from third-party vendors or the state, and those prices may very well increase over time. The only costs the service provider can control are those for the services it provides. 

Lastly, one very good reason to prepay for a funeral is that money placed in a funeral trust is no longer considered an asset in the event you need to qualify for Medicaid (for example, if you need to go to a nursing home). Medicaid has very strict “spend down” rules that allow potential beneficiaries to keep only about $2,000 in total assets if they want to qualify for financial help. And since you will need to be buried or cremated eventually, it makes sense to use a portion of your assets to pay for your funeral expenses if you anticipate needing Medicaid. Keep in mind, though, that these assets must be placed in an irrevocable funeral trust, which means you cannot cancel your preneed contract and get your money back.

Sources

“How Irrevocable Funeral Trusts Help Medicaid Applicants Qualify for Medicaid Long-Term Care”. American Council on Aging. https://www.medicaidplanningassistance.org/irrevocable-funeral-trust/ 

Although rare, fraud or misappropriation of funds is always a possibility when you invest in a preneed funeral plan. For example, in 2009, an Ohio-based funeral services company bilked over 97,000 customers, including consumers, funeral homes, insurers and financial institutions, of over $600 million when it failed to buy insurance policies with the money it held in trust. That case resulted in a civil judgment of nearly $500 million and prison terms for several of the principals involved. 

More recently, in 2019,. the Neptune Society and its parent company, Service Corporation International(SCI), were sued by the State of California for allegedly bilking clients of over $100 million by failing to put 100% of prepaid funds into a state-regulated trust as required by California law. Although the suit did not allege that clients failed to get the services they paid for, it claimed that many customers who cancelled their contracts were denied refunds because the money simply wasn’t there. The lawsuit ended in a stipulated judgement that required SCI to pay retribution to all harmed customers and $23 million in civil penalties. 

Another major risk of preneed plans is that they may not be portable, even if the service provider claims they are. Thus, if you move to a different state or decide to change service providers, you may not be able to get your money back, the Funeral Consumers Alliance warns. This can also be the case if you change your mind about what you want — for example, if instead of going with a full-service burial you decide on direct cremation. instead. In some cases, you may be able to terminate the agreement entirely, but this typically comes with a termination fee, which can be as high as 30%. Furthermore, any price guarantee you were given in the original contract won’t be valid anymore, so the total price may go up. 

Additionally, if your service provider buys an insurance policy with your money, it may not pay a death benefit for one, two or even five years. 

With that being said, many of the risks of preneed contracts can be mitigated if you read the contract carefully and ask questions before you sign. Although some funeral service providers are unscrupulous, most are honest business people who will be happy to answer any questions and go over the contract with you if you ask. 

Sources

“Funeral scam figures get prison sentences in St. Louis federal court”. Insurance News. https://insurancenewsnet.com/oarticle/Funeral-scam-figures-get-prison-sentences-in-St-Louis-federal-court-a-420755 

“Pre-Planning & Pre-Paying”. Funeral Consumers Alliance. https://funerals.org/get-help/pre-planning-advance-directives/ 

“Attorney General Bonta Announces Service Corporation International, Nation’s Largest Funeral Service Provider, to Pay $23 Million Penalty and Consumer Restitution for Consumer Protection Law Violations”. State of California Department of Justice. https://oag.ca.gov/news/press-releases/attorney-general-bonta-announces-service-corporation-international-nation%E2%80%99s 

Unfortunately, there are no federal statutes that specify how funeral service providers handle preneed funds. So where your money goes depends on the laws in your state and, to some extent, on whether you are contracting with a cemetery or funeral home. According to Joshua Slocum, former Executive Director  of the Funeral Consumers Alliance, all states in the U.S. mandate that pre-paid monies be placed in a funeral trust or be used to purchase a life insurance policy with the service provider as beneficiary. However, according to AARP, states vary as to how much of the money you prepay must go into a trust account. Many states require that funeral directors deposit 90%–100 % of preneed funds into a state-regulated trust. However, other states require them to set aside as little as 40%.

Pre-need contracts with cemeteries are even less regulated. For example, more than 30 states only require sellers of cemetery goods and services to put 75% or less of the money you invest in a preneed cemetery plan into a trust according to AARP.   
Additionally, many preneed contracts allow a service provider to withdraw money from prepaid funds if it can prove it purchased goods or services for you. So, for example, if a funeral director orders a casket in advance and stores it in a warehouse, they can withdraw the cost of the casket from the prepaid funds. Sadly, some unscrupulous service providers have abused this contractual loophole by charging consumers far more than the goods they purchased were worth. For example, in 2009, the state of Colorado filed suit against the Neptune Society, a company that sells preneed cremation services. The state accused the company of grossly overcharging customers for goods it provided — for instance, helping itself to $349 for a $13 urn. The company ultimately settled with the state for $630,000.

Sources

“Neptune Society and the Trident Society Settlement”. State of California Department of Justice. https://oag.ca.gov/consumers/neptune-trident-settlement 

“​​California AG Says Funeral Service Provider Made a Killing – At Consumers’ Expense”. Kelley Drye. https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/california-ag-says-funeral-service-provider-made-a-killing-at-consumers-expense 

When you purchase a preneed plan, whether it’s to purchase a burial plot, cremation services or a full-service funeral, you typically have several options: 

• Pay cash up front 
• Enter into an installment plan
• Fund the purchase through an annuity or existing life insurance policy
• Purchase a preneed insurance policy — paid for in cash or through monthly installments

If you choose one of the first three options, your money will be placed in a state-regulated trust and managed by a trustee. Be aware, however, that state laws differ in how much of your money must be deposited into the trust. Additionally, your money will earn interest, but this interest typically will not go to you or your next of kin. Virtually all preneed contracts pay the total amount left in the escrow account at the time of your death to the beneficiary of the trust — the funeral home or service provider with whom you entered into the contract. In some instances, this may mean that the amount the funeral service provider receives is actually more than the cost of the funeral services provided to you.

With that being said, if you terminate a preneed contract and the money is in a trust, you will receive any interest earned. However, in most cases you will need to pay a termination fee in whatever amount is allowed by state law.

If, on the other hand, you fund a preneed contract with an insurance policy, the funeral service provider will buy a policy in an amount equal to the goods and services purchased by you and name itself as the beneficiary. You should know, however, that unless you pay for the policy up front, the total amount of your installment payments will almost always equal or exceed the face value of the policy. Additionally, if you terminate the contract and cash out the policy, you will only receive about half of what you paid into it.

Sources

“Is a Prepaid Funeral Trust Part of an Estate? Understanding Your Options” Wills.com Learning Center. https://learning-center.wills.com/is-prepaid-funeral-trust-part-of-estate/ 

The ability to cancel your funeral insurance policy or trust depends on the terms outlined in your agreement. You will find that funeral trusts can be revocable or irrevocable, which affects whether you can cancel the trust and receive a refund. Revocable trusts allow you to request cancellation and a refund, while irrevocable trusts are permanent and do not offer this option. Funeral insurance policies typically have fewer restrictions on cancellations; however, you need to continue paying the premiums for your coverage to remain in effect.

If you choose an irrevocable funeral trust, it will restrict access to the trust’s assets until you have passed away, allowing your beneficiaries to receive these assets only after your death. 

When you set up an irrevocable funeral trust, the assets are owned by the trust and managed by a trustee, which could be a bank, funeral home, or a company specializing in trust management. This arrangement prevents you from canceling the trust, as you do not retain control over the assets. In contrast, with a revocable trust, you maintain control of your assets and can modify or dissolve the contract, leading to cancellation.

It’s important for you to review the documentation associated with your funeral policy or trust to understand the cancellation processes, if applicable, as well as any potential fees or penalties related to your decision. Typically, cancellation fees are more common with revocable trusts than with funeral insurance. If you are considering canceling your funeral insurance policy or trust, it’s advisable to contact your insurance provider or trustee to discuss potential alternatives, understand the financial implications of cancellation, and determine the best course of action based on your needs.

Sources

“Complete Guide to Prepaid Funerals: Plan, Costs, Pros & Cons”. Lincoln Heritage Funeral Advantage. https://www.lhlic.com/consumer-resources/how-pre-paid-funeral-plans-work/#irr 

“The pros and cons of funeral trusts”. Bankrate. https://www.bankrate.com/insurance/life-insurance/funeral-trusts/