Should You Pre-Pay for Your Own Funeral as Part of Estate Planning?

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Questions around death planning can feel overwhelming: Cremation or burial or natural organic reduction? What will your family want, and what will it cost? Do you really need to think about all this if you're young and healthy right now—or can you put off these decisions until you're older or dealing with a life-threatening illness?

The experts we spoke to all agreed that there are major benefits to pre-planning and even pre-paying for a funeral now, no matter what your age or health status is. Here's what individuals and families need to know to plan ahead and make the best decisions, financial and otherwise.

The benefits of pre-planning

Most deathcare professionals agree that funeral pre-payment has valuable benefits for people of all ages and health statuses. One of the biggest benefits to pre-planning and pre-paying is the emotional support and relief these offer family members and others you are close to, Maggie McMillan, vice president of the Los Angeles-based Wiefels Group and All Caring Solutions Cremation and Funeral Services, explains.

"If and when the unexpected happens, you want everyone to already know what your wishes are, because that will make it easier when hard emotions inevitably come up after you are gone," McMillan explains. Knowing that your family is prepared and taken care of with prepayment can also help alleviate your own stress and improve your mental health.

Larry Stuart Jr., founder of Raven Plume Consulting in Tulsa, Okla., offers another perspective: If an individual makes plans without consulting their family and without prepaying, and those plans turn out to be different than what the family wants, that pre-arrangement can actually become a bit of an emotional burden. Involving your family and loved ones in making pre-arrangements and financial decisions together can ease that burden.

"We forget sometimes that funerals are not for the dead; they are for the living," Stuart explains. "I think it's very important to think about not just what you might want, but what your family and loved ones will want, and more importantly, what they will need after you're gone. Funerals and memorials are an important part of the grieving process, and there should be room in your plans for your family's wishes as well—because let's face it, you aren't going to be around for your funeral, and worrying about bills and finances in times of grief isn't pleasant."

Another perk of pre-paying for your funeral is that, depending on what method of pre-payment you get, you can often lock in a price guarantee on services and merchandise based on current pricing on the day that you plan. This way, your family is protected from industry inflation and price fluctuation.

Kasey Scott, advance planner at the Wiefels Group, says that funeral costs double every decade, on average. Say you're looking at pre-paying for a service that costs $3,000 today. If you didn't pre-pay and pass away 10 years later, you could be looking at fees upwards of $6,000 for the exact same service.

For some people, all aspects of pre-planning and paying may not seem the right option. For example, a plan that isn't transferable to different states doesn't make sense for individuals with a more nomadic lifestyle. However, in that case, talking to loved ones about what your final wishes are (like where you'd like to end up, and the disposition method) would be a relief for them in case the unthinkable happens. The experts agree that no matter what your situation is, some level of pre-arranging is a good idea.

How to pre-pay for your funeral

There are two primary ways to pre-pay for a funeral: via either pre-need funeral insurance policies purchased through a funeral home, or by setting up a funeral trust with a bank or financial institution. Each method works a bit differently.

Start the process for either by making an appointment to talk to your local funeral home or death care professional. Pre-need arrangements are a big part of the funeral home business, and the professionals in your community will be equipped with knowledge about the stipulations, laws, and policies applicable to your state.

Another factor to consider when getting started is the issue of your age and current health status. Unlike life insurance policies, funeral planning insurance from most major providers is available to any person over 18 who wants a policy. However, depending on the type of policy that's right for you, and the company you choose, you may have to answer some health screening questions—which will affect the terms and benefit payouts determined by time of death.

For instance, if you have been given a terminal diagnosis with a short prognosis for life, and you aren't able to pre-pay in full for the funeral insurance policy you want, you can still set up a three- or five-year insurance plan with most companies and funeral homes. However, for the policy to pay out full benefits and cover the entire cost of the funeral (as it is designed to do), you must either live long enough to finish paying out the policy, or have made a minimum amount of payments determined by the policy.

Otherwise, the money you have paid into the policy at the time of your death goes directly toward the cost of funeral arrangements, and family members are responsible for the difference between what you've paid and the total cost of the funeral. You could also set up a trust, but keep in mind that the amount in the trust at your time of death is all you'll have toward the cost of your funeral.

McMillan explains that pre-arrangement insurance policies do need to be paid in full by age 90, so someone who is near that age and planning for the first time will have to likely pay in full up front. Also, health factors and policies do differ between insurance companies.

Some companies might deem certain diagnoses with imminent death disqualifiers for policies. Others will insure individuals with a short life prognosis, but with altered payout clauses—or they may require full payment up front. This is a case in which trusts might be a better choice. Keep in mind that companies, policies, and regulations vary greatly by state, and it will be helpful to consult your local funeral home on the options best for you.

Many experts also suggest finding professional support in your planning, along with keeping family members in the know, depending on your goals and needs. If you have a financial advisor or an estate planner, they will be able to guide you through whether insurance or trust is right for you, and how much to set aside for arrangements.

"I recommend revisiting your plans periodically throughout life," Rob Goff, executive director of the Washington State Funeral Director Association and owner of Dignified Assurance Planning, advises. "What you want today in your 20s may not be what you want in your 30s or your 50s or your 80s…you want to keep that planning program available as a living document so that it can change with your needs and your wants."

He also recommends keeping your family up to date on any changes you make, and being aware that your family members and next-of-kin may change throughout your life. Maybe you have a different spouse, or you get to the point where you have a person who has power of attorney. Those are things that you want to pay attention to.

Know your options: insurance or trust

There's one main difference between trusts and insurance policies, according to Goff: Insurance will often have a clause allowing for the difference between what you've paid and the total cost of your funeral arrangement to be covered if you haven't paid your policy out in full at the time of death. A trust, meanwhile, will typically allow you to put in whatever amount you want over any length of time. A trust is more like keeping spare change in a bucket in your living room—the amount you have in it at the time of your death is the amount you'll have for your funeral. Period.

What is funeral insurance?

The pre-arrangement insurance policies used by funeral homes to cover the cost of funerals are different than what is generally known as "life insurance." A life insurance policy is meant to cover unexpected death, but is never guaranteed to pay out benefits—because factors like cause of death affect the policy payout.

One of the benefits of an insurance policy through a funeral home is that you have the option to pre-pay in full with what is called a single-pay option, locking in prices and guaranteeing full coverage benefits regardless of health or time of death. For those who aren't ready to drop one large sum, there are also multi-pay options that set up a three-, five-, or 10-year payment plan with varying payout policies—according to factors such as length of contract and health.

Each payment plan works differently, Scott says. An extended multi-pay pay policy, for example, would require monthly premium payments and an insurance fee. It's similar to a car insurance policy, but the major difference is that unlike car insurance, even if you're a good driver, a death insurance policy is 100 percent guaranteed to be used...eventually.

If a healthy person makes a 10-year plan, they make their payments regularly, and they die at year five, that person is covered and locked in at the prices of the arrangements from when they made the plan. If they live those 10 years and finish making their premium payments, when they do pass away, the funds that were paid into insurance fees and interests above and beyond the cost of the funeral arrangements can actually go back to their estate or be paid out to loved ones who are listed on the policy.

Ultimately, there are three benefits to insurance, Scott says. First, it can often lock in the price of goods and services from the funeral home. Second, all of the paperwork will be taken care of for your family ahead of time. Third, there is no interest that accrues—just an insurance fee that, if the plan is paid out in full, can be returned to your beneficiaries.

Also, many pre-need funeral insurance policies are transferable to different funeral homes in different cities or states, which could be a huge benefit to a young person who isn't sure what the next 10, 20, or 50 years of their life will look like. Transfer stipulations vary by state and insurance company, and sometimes the price guarantee dissolves with a transfer, so talk with your funeral home about the options available to you.

It's important to note that pre-need funeral insurance does not guarantee a fixed rate for the cost of "cash advance" items like death certificates, clergy fees, permits, sales tax, or any fee determined by the government or an outside party that is not the funeral home. That's because the home does not have control over the inflation of those items over time like they would for products and services in-house.

What is a funeral trust?

The Internal Revenue Service defines a funeral trust as "a pooled income fund set up by a funeral home/cemetery to which a person transfers property to cover future funeral and burial costs," according to Bank Rate. Trusts are typically set up between three parties: yourself, a bank that holds the assets in the trust, and the funeral home that will receive the funds to cover the cost of the funeral after your death.

There are two types of funeral trusts: revocable and irrevocable. Each type has benefits and drawbacks. According to Goff, the drawback to a trust in many cases is that if you die and it isn't paid in full, or you haven't put in the full amount that you need to cover your funeral, the amount that's currently in the trust is all that you will have—and your family will be responsible for the difference. An advantage of trusts is that, in Washington State for example, they can be used primarily for people who aren't insurable because of extreme health conditions, old age, or imminent death.

Thinking about death and talking about end-of-life planning with your loved ones is never easy. But the benefit of knowing that you've eased the emotional and financial burden that funeral planning can entail in times of grief is worth it in the long run.