Business

Pre-funding can be a part of funeral planning

A column offering help for your wallet

By Katherine Vogtcovered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06. Posted Jan. 17, 2005.

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The toll that a death takes on a loved one or relative can go well beyond the emotions of grief and loss. Often overlooked is the fact that paying for a funeral can be one of the most expensive purchases of that person's life.

The Federal Trade Commission estimates that the average funeral, including a casket and vault, costs about $6,000. But extras such as flowers and newspaper death notices can add thousands more, and many funerals well exceed $10,000. With more than 2 million funerals every year, that means Americans spend billions of dollars each year to lay their loved ones to rest.

To protect friends and families from the added heartache of economic hardship, industry experts say that more and more people are taking measures such as pre-funding their funerals or factoring those costs into their estate plans. With payment methods ranging from trusts and life insurance to simple bank accounts, options can be tailored to individual financial needs.

To plan ahead, it's necessary to have an idea of what type of funeral arrangements are wanted. The total tab can vary widely depending on the type of services.

The biggest price variable is the casket, which can range from a few hundred dollars to a few thousand, said George Clarke, executive director of Selected Independent Funeral Homes, a 1,500-member organization of funeral homes.

He said that, contrary to popular belief, cremation is not necessarily less expensive than earth burial because accompanying services and other costs can add up. And even making an anatomical donation to an academic medical center can have costs associated with it for transferring the body, cremating the remains or preparing the death certificate.

Costs can also vary depending on which funeral home makes the arrangements.

Clarke said the best way to avoid paying too much is by shopping around. Cost information should be easy to come by because funeral homes are required by federal law to give out itemized prices of their services either in person or to callers on the phone.

"People should approach the pre-funding of funeral arrangements for themselves or others the same way they would approach any other financial transaction, and that is to know what their options are," he said.

When people pre-select their funeral arrangements, it may help their families avoid having to make decisions about what type of tribute is appropriate, said Drew Kanaly, vice chair of Kanaly Trust Co., a Houston-based, fee-only financial services company. "They could end up confusing an economic issue with an emotional one," he said.

Clarke said it is important for people to inform their loved ones what types of arrangements have been preplanned and to make sure that documentation is available to them to avoid confusion and conflict.

Though some people simply select their funeral preferences in advance without payment, others actually pay for the services upfront or prepare for how the payments will be made as part of their estate planning.

The National Funeral Directors Assn. said one of the payment methods commonly used is establishing a bank account that is designated to fund the funeral arrangements. Savings and certificate-of-deposit accounts can be designated so they are payable on death to the funeral home.

Kanaly said that setting up some sort of bank account is a good way to set aside money for funeral arrangements, but he wouldn't recommend putting the account in the funeral home's name. He said it makes more sense for it to be payable to a survivor or the estate. "Then they can make decisions about what makes sense to pay for," he said.

Others may choose to buy insurance to pay for the arrangements, and many funeral homes can offer the names of insurance companies that offer the policies, said Clarke. The policy may be created so it is equal to the value of the arrangements that have been selected. And in some states, a funeral home can be the policy beneficiary so the survivors don't have to get involved.

Clarke said insurance policies are attractive because they enable people to pay for funeral expenses over a period of time and because they are portable, so the person could rename the beneficiary.

However, Kanaly said the insurance plans "are just not very efficient because basically you're splitting the time value of the money with the person who's offering [the plan]."

A third payment method is using a trust.

Jennifer Williams, a financial adviser in San Francisco with Merrill Lynch, said some financial firms are affiliated with funeral homes and create trusts specifically for this type of expenditure. She said the funds are typically invested conservatively.

Williams said some of the trusts are portable across state lines, but Clarke said some of them are irrevocable and therefore can limit flexibility.

Before putting down any money, Clarke said it is important to ask whether the price is guaranteed so the bill remains the same at the time of death. Depending on what payment method is being used, interest that accrues on the account may be used to offset any inflation of prices.

Williams said prospective buyers should ask what happens to the funds during the time they are invested, whether there is a rate of return on the funds, whether there are cancellation fees and whether the funds can be transferred.

"If the provider cannot give you a clear answer, you probably should not make a deposit," she said.

Katherine Vogt covered hospital and personal finance issues, physician/hospital relations, and ancillary health facilities for us during 2003-06.

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ADDITIONAL INFORMATION

Paying beforehand

The National Funeral Directors Assn. recommends asking the following questions when determining which method is the best way to prepay for a funeral:

  • Who receives the interest on the account?
  • Who must pay taxes on the interest?
  • Is the prepayment ever refundable, in part or in full?
  • Can the plan be used at a funeral home of my choice?
  • What happens if the funeral home goes out of business or is sold?
  • In the event that I move, is the pre-funded plan transferable?

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