Answers ยท Life Insurance
Is a preneed funeral plan a good idea?
Sometimes. A preneed funeral plan can make sense if you want one specific funeral arranged now, your family would struggle to handle it, or you are planning around Medi-Cal. For most people with savings, writing down your wishes and keeping the money in a payable on death account leaves more flexibility, because a preneed contract ties your money to one funeral home.
A preneed plan buys one specific funeral from one funeral home.
You sit down with a funeral home, choose the goods and services, and pay now, either all at once or over time. When you die, that funeral home delivers what you picked. Some contracts lock the price of those items. Others only apply your money toward whatever the price turns out to be.
That is a different thing from final expense insurance, which pays cash to a person you name, who can use it at any funeral home or for any bill. A preneed contract pays for a funeral at the place you signed.
So you know who is talking: opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary, and this is general education, not advice on your situation.
Where your money sits decides what you can get back.
In California, money you pay a funeral home for a preneed contract generally has to be held in trust. If you cancel, the refund is what went into the trust plus the income it earned, minus a revocation fee. State law caps the reserve for that fee at 10 percent of the trust principal. On 8,000 dollars, that is up to 800.
If the funeral home closes or sells without transferring its contracts, California law says the funds come back within 30 days with no revocation fee taken out.
Other plans are funded by a small life insurance policy, and the funeral home gets paid from it at your death. Those follow the policy's rules instead. In the early years, what you can get back may be less than what you have paid in. Any policy benefit depends on the claims paying ability of the insurance company that issued it.
A locked price is only worth what funeral prices do from here.
The main pitch is that you pay today's prices. Run the numbers before you take that at face value. Say a 68 year old prepays 8,000 dollars and lives 20 more years. If funeral prices rise 3 percent a year, that funeral costs about 14,450 dollars by then, and the locked price looks great.
Now keep the 8,000 in savings instead. At 4 percent it grows to about 17,500 dollars. At 2 percent it reaches about 11,900. These are illustrative numbers, not a forecast. The lock wins when your money would have earned less than funeral prices rose, and loses when it would have earned more.
Read what the lock covers, too. It often applies only to the funeral home's own goods and services. Flowers, death certificates, newspaper notices and clergy fees are usually billed as cash advance items, and a cemetery plot is often a separate purchase. Your family can still get a bill.
You can plan the whole funeral without paying for it.
Most of what people want from a preneed plan is a decision made in advance, and that part is free. Under the federal Funeral Rule, a funeral home has to give you itemized prices, and you can choose only the goods and services you want. Get the price list, write down what you want, and give it to the person who will carry it out.
Then put the money in a savings account with a payable on death designation. It generally skips probate, it stays yours while you are alive, and it goes with you if you move.
If you do prepay, tell your family and show them the contract. Families who do not know about a plan can end up paying for the same funeral twice.
It fits a few situations well, and we have a stake in this too.
A preneed plan tends to fit when you have no one who can handle the arrangements, when you plan to stay near that funeral home for good, or when you want the decision off your children's plate and are willing to pay for that.
Medi-Cal is the other reason. Irrevocable burial arrangements can be treated differently from ordinary savings when someone applies, and those asset rules have been changing. Talk to an elder law attorney before you sign one for that purpose, because irrevocable means you cannot change your mind later.
It tends to fit poorly when you might move, when you could need the money, or when the seller is pressing you to decide today.
opfinances.com earns a commission on life insurance, including the final expense policies that compete with preneed plans. Weigh our opinion with that in mind, and ask anyone selling you a plan, us included, how they get paid.
Before you decide
Questions worth asking.
Is my money going into a trust or into a life insurance policy, and can I see the document that says so?
If I cancel next year, exactly how many dollars do I get back, and what fee comes out?
Which items are price locked, and which ones could my family still get billed for at the time of death?
What happens to my contract if I move out of the area, or if this funeral home is sold?
If the funeral costs less than what is in the plan, who keeps the difference?
How much commission or profit do you make if I sign this today, and why does it need to be today?
Related
Can I cancel a preneed funeral plan in California?
A trust funded plan that is revocable can generally be cancelled for what went into the trust plus earned income, minus a revocation fee limited by a reserve of up to 10 percent of the principal. An irrevocable arrangement generally cannot be cancelled. An insurance funded plan follows the policy's own terms.
What happens to my preneed plan if the funeral home goes out of business?
In California, if a funeral home closes or sells without transferring its contracts, the funds held in trust are to be returned within 30 days with no revocation fee deducted. Keep your contract and the trust details somewhere your family can find them.
Is a preneed plan the same as final expense insurance?
No. Final expense insurance pays cash to a beneficiary, who can use it at any funeral home or for any bill. A preneed contract is signed with one funeral home and pays for specific goods and services there.
Do I have to prepay to plan my funeral in advance?
No. You can get a funeral home's itemized price list, write down exactly what you want, and share it with your family without paying anything. Money set aside in a payable on death account can then cover the cost.
Where this fits.
This question sits inside a bigger one. Life Insurance walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.