Pre-need Life Insurance

While you may take pleasure in planning the details of your life, from birthdays to vacations, raising children to pursuing education, many are not comfortable with planning for the end of life. But taking the time to make and execute a plan for your final wishes is one of the most thoughtful things you can do for your loved ones during your lifetime.

According to the National Funeral Directors Association (NFDA), depending on your geographical location, the average cost for a simple funeral with basic casket is about $5,500 to $6,700. Add flowers, limousine service, catering, and announcements and you could be looking at charges upwards of $10,000. Other costs, including cemetery fees or account inflation, can increase death related expenses. However, pre-paying for your funeral can lock in a price so there are no additional fees at the time of need.

Make Your Own Choices

Pre-planning your funeral can be done at most funeral homes. The Federal Trade Commission has a Funeral Rule that requires funeral directors to provide a price list for all goods and services, which can help in the decision making process. While many people choose to pre-plan in order to alleviate the burden on their grieving families, Arvin Starrett, director of Starrett Funeral Home in Paris, Texas, believes the planning process has greater significance.

"We encourage families to prearrange. Those who have to live with the decision should be involved in making the decision. In the past, people have pre-arranged and taken care of everything, then the kids walk in and have nothing to say about it," Starrett says. "I don't think it's a healthy situation for a newly grieving child. Participation beforehand is very important."

Pre-pay Options

After you've decided on the terms for your funeral, you should consider arranging payment before death. There are three common ways people choose to pre-pay funeral expenses:

  1. Final need insurance
  2. Pre-need trusts
  3. Pre-need insurance

Final Expense Insurance

Final expense insurance is sold either as a term life policy, which is for a specified period of time or until you reach a certain age, or as a whole life policy that does not expire. But unlike other life insurance policies, final expense insurance can be purchased in smaller benefit amounts like $5,000.

These policies are generally low in cost; however, if you are in poor health, this type of policy may not be for you. You run the risk of receiving a graded death benefit, which means the full value of your policy is not paid out should you pass away within the first few years. The coverage amount increases over time, making this a less attractive option for those with very serious health concerns.

When you purchase final expense insurance, you are required to select a beneficiary. This should be someone you can rely upon to carry out your final wishes. When the policyholder passes away, the money is disbursed to the beneficiary and it's up to them to do as you ask. Rather than using the funds for your final expenses, your beneficiary could pocket the money, so it is important to choose your beneficiary carefully.

Pre-need Trusts

Upon death, a pre-need trust transfers funds you deposit into an account set up at a federally insured bank to the funeral home to pay for services. Like other types of trusts, the performance of the assets affects the value of your trust, which could increase or decrease over time. This makes locking in your funeral's costs of utmost importance; funeral homes know they are accepting the risks of a fluctuating market and regardless of your trust's performance; your funeral goes on as planned.

If your trust performed better than anticipated, what happens to the money left over after the funeral costs have been paid? It depends on the state you live in. Some states require overages be sent to the family, while others states allow the funeral home to keep the excess funds.

Pre-need trusts can be offered as revocable or irrevocable, but make sure you are aware which kind you're being offered. Revocable trusts give you the option to withdraw the funds, whereas irrevocable trusts do not. However, a revocable trust can hurt you if you're trying to qualify for social services like Medicaid because it counts against you as an asset.

Pre-need insurance

Pre-need insurance is a life insurance policy, but the beneficiary of this type of policy is the funeral home. Like pre-need trusts, it's important to make sure your funeral's costs have been guaranteed so your pre-need insurance policy covers all related death-expenses.

One advantage of pre-need insurance is that the beneficiary can be changed to a new funeral home in the event you move, or choose to use another provider. Another advantage over pre-need trusts is that these insurance policies cannot be counted as an asset, so social service asset limits aren't affected.

Tax Considerations

Keep in mind that tax implications are also a consideration when you are putting together your pre-need arrangements.

"Depending on how a trust is charged, the purchaser might have to show the income on taxes. It could also be structured so the trust will pay the taxes," Starrett says, "But an insured product is generally not taxed."

Where Can Pre-pay Options Be Purchased?

Final expense insurance is sold by insurance agents. Other pre-need insurance options, pre-need trusts and pre-need insurance, are often sold through funeral homes, but Starrett points out some states do not allow funeral homes to offer pre-need insurance. Check with your funeral home director to see which is offered, or if both are available.

Choose Your Pre-need Provider Wisely

Whichever funding option you choose, Starrett advises using a reputable firm, and notes that NFDA members subscribe to a written code of ethics. The NFDA website has a pre-need purchasers' "bill of rights," which Starrett suggests people read before choosing a funeral home. While it can be uncomfortable to discuss your own death, once you create a plan you may have the peace of mind knowing your wishes are executed and your loved ones won't be stuck with the bill.

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