Pre-Paid Funeral Plans: How They Work, Risks and What to Ask

A pre-paid funeral plan, also called a preneed contract, is an agreement to pay a funeral home or cemetery now for goods and services you will need later. In the US, each state sets its own rules, and the Federal Trade Commission (FTC) warns that some state laws offer little or no effective protection. The plan itself can be a good way to spare your family the decisions and the bill, but the contract matters more than the idea, so read it closely before you pay.

What is a pre-paid funeral plan?

You choose the funeral home, the type of service and the items you want, and you pay in one lump sum or in installments. The provider then agrees to carry out those choices when you die.

Pre-paying is not the same as pre-planning. Pre-planning means writing down your wishes and deciding who will carry them out. You can do that without paying anyone. Pre-paying adds a financial contract, and that is where the risks sit. Our guide to pre-need versus at-need funeral arrangements explains the difference in more detail.

The FTC Funeral Rule applies whether you arrange a funeral when a death occurs or in advance. It lets you choose only the goods and services you want and pay only for those. The funeral home must give you its General Price List to keep, which is the starting point for any plan. See our guides to the FTC Funeral Rule and the General Price List.

How is the money held?

States handle this differently. According to the FTC, some states require the funeral home or cemetery to put a percentage of your payment into a state-regulated trust. Others require the seller to buy a life insurance policy and assign the death benefit to the provider. Some laws give little or no effective protection.

• Trust: Your payment goes into a trust or a dedicated account. The provider is paid from it when the funeral happens.
• Insurance: Your payments buy a life insurance or annuity policy that names the provider as beneficiary. This is sometimes called a funeral or burial insurance policy. Our guide to pre-paid plans versus funeral insurance compares the two.

The FTC suggests asking how your state requires prepaid money to be handled, who receives any interest it earns and what protections exist if the funeral provider goes out of business.

What are the risks of pre-paying?

The Funeral Consumers Alliance, a nonprofit consumer group, lists several downsides of prepaying:

• If you cancel or change the plan, you may not get all your money back.
• The seller may withdraw the interest from the account each year.
• The cash-out value of an insurance policy can fall well below what you paid.
• Insurance may not pay full benefits in the first years of premiums.
• Today's payment may not cover future costs.
• Your family may not know about the plan and could pay for a second funeral.
• Moving funds between funeral homes can be complicated.
• The funeral home may close or change hands.

The last point matters more than people expect. A plan with a funeral home that closes in 20 years is only as good as the trust, the insurer or the state rules behind it. Our guide on what happens if a plan provider fails covers this in more depth.

Revocable or irrevocable: which is which?

A revocable plan lets you cancel and take your money back, subject to the contract terms and state law. An irrevocable plan cannot be cancelled for a refund. People often choose irrevocable plans when they are applying for Medicaid or SSI, because the irrevocable status affects how the money is counted (see below).

Which type you are offered, and what refunds look like, depends on your state. Two examples show how far the rules can differ:

• New York: Prepaid money must be deposited within ten business days into an interest-bearing account at an authorized financial institution in New York. Before goods or services are delivered, you can demand back everything you paid with interest, except for irrevocable agreements made for SSI or Medicaid recipients. The provider must notify you in writing of the deposit within thirty business days and send annual statements on where the account is and the interest earned.
• Florida: You can cancel a preneed contract within 30 days of signing and get a refund of what you paid, except for anything already used. After that window, refunds for services and cash advance items remain available, but a refund for merchandise is limited to cases where the provider fails to deliver as promised, and the seller is paid the accumulated earnings on the money.

These summaries come from New York General Business Law section 453 and Florida Statutes section 497.459. Laws change, so check your own state's current rules, usually through the state agency that licenses funeral homes or its attorney general.

How do Medicaid and SSI treat a pre-paid plan?

This is one of the main reasons people prepay, and it is also easy to get wrong. For SSI, federal rules exclude burial spaces from countable resources and allow up to $1,500 per person to be set aside for burial expenses if the money is kept separate and clearly designated. The same regulation says money in an irrevocable burial trust or arrangement is counted against that $1,500 exclusion (20 CFR 416.1231).

Medicaid eligibility rules vary by state. The Funeral Consumers Alliance notes that Medicaid counts a payable-on-death bank account as an asset. If a nursing home stay or a benefits application is coming, a short conversation with your state Medicaid office, an elder law attorney or a local Area Agency on Aging can save a costly mistake. Our guide to Medicaid and funeral assistance has more.

What are the alternatives to pre-paying?

If the risks bother you, there are ways to reduce the financial burden without handing money to a funeral home:

• Prearrange without prepaying. Compare prices at several funeral homes, record your choices in writing and share them with your family. The Funeral Consumers Alliance recommends this for people who do not want to prepay.
• A payable-on-death (POD) account. This is a bank account that stays in your name, can be reached right after you die and avoids probate delays. The Funeral Consumers Alliance says it is FDIC-insured, you can withdraw anytime, and the interest is taxable. As noted above, Medicaid counts it as an asset.
• Funeral or life insurance. Coverage pays your family cash rather than the provider, so they can use it wherever they choose. Price and terms vary a lot. See our funeral insurance guide.

What should you ask before you sign?

The FTC suggests these questions, and they are worth asking in writing:

1. What exactly am I paying for? Only merchandise such as a casket or vault, or services too?
2. How does my state require the money to be handled?
3. Who receives the interest on the money?
4. What happens to my plan if the funeral home closes or is sold?
5. Can I cancel and get a full refund?
6. If I move or die in another place, can the plan be transferred, and what will that cost?

Add three more of your own. Does the plan price include everything your family would pay, or only some items? What would happen if prices rise and the amount paid falls short? Is there a waiting period before an insurance-funded plan pays in full?

Also ask for a copy of the contract before you decide, and compare it against the funeral home's General Price List. If you are weighing plans, our guide on how to choose a pre-paid plan walks through the comparison, and cancelling a pre-paid plan and transferring a plan cover the exits.

What about pre-paid plans in the UK?

UK plans work differently. They are regulated by the Financial Conduct Authority (FCA), and since 29 July 2022 a provider must be authorised to sell them. You can check a firm on the FCA's Firm Checker. The Financial Services Compensation Scheme (FSCS) protects plans up to £85,000 per person per firm if an authorised provider fails. Unauthorised firms are not covered by the FSCS or the Financial Ombudsman Service, so it is unlikely you would get your money back. Our UK pre-paid funeral plans guide has the full picture, including costs and cancellation.

What to do next

1. Read the FTC's planning guidance and ask a few funeral homes for their General Price List.
2. Decide whether you want to prepay, or only pre-plan and write down your wishes.
3. If you do prepay, get the contract in writing and ask the questions above, including what happens if the funeral home closes.
4. Tell your family and your executor what you chose, and give them copies. Do not keep the only copy in a safe deposit box, because your family may have to make arrangements before it can be opened. Our guide to telling family your funeral wishes can help with that conversation.