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Pre-paid funeral plans can be risky business

Many people like the idea of pre-paid funeral plans because they allow funeral services to be locked in at today’s prices, and save family members the trouble of selecting caskets and attending to other matters at a time of great sadness and stress. 

But if you’re thinking of such a plan, be cautious.  After you’ve paid, there’s always a risk the funeral home will go out of business, or the owner (or a new owner) will abscond with the money.

A well-known mortuary in Memphis was in the headlines recently when the new owner announced he had no intention of honoring some 13,500 pre-paid funeral contracts.  The owner now faces criminal charges that he effectively stole the funds.

While this case is unusual, its not unique.  Funeral homes in general are regulated by the Federal Trade Commission, but pre-paid burial plans are regulated by individual states, and many state regulations are very lax.

In addition, pre-paid plans make it hard to change your mind.   In some states, if you’ve paid for a casket and later decide you want to be cremated, the funeral home can simply keep the money you paid for the casket even though you wont use it.

A number of alternatives to pre-paid funeral plans are available.  One is simply to buy life insurance to cover the funeral costs.  Another is to use a “pay on death” bank account earmarked for funeral expenses, with instructions to the beneficiary on how to use the money.

Some people buy single-premium life insurance and put the policy into a “funeral trust”.  This can provide tax benefits, and can also shelter the funds from Medicaid requirements.

One advantage of this type of planning is that you can set aside funds not only for the funeral itself, but also for travel and lodging expenses for family members.

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