July 8, 2008
	Many individuals and families are making the decision to arrange their funerals in advance, a task known as funeral preplanning. Because of the many types and varieties of programs available to fund prearranged funerals, these guidelines have been developed to help you make wise decisions when you plan. Information that follows does not endorse funeral preplanning, preneed, or any funeral home, company, product or type of funding arrangement. To Wisely Plan and Prefund a Funeral ... before the need arises ... make informed choices! To do so, first you need to know: What type of funeral you want How much you can afford If there are guarantees on the goods and services you choose What happens if you move or want to change funeral homes If there are tax consequences related to the funding If you'll be protected against inflation. Funeral preplanning is basically a three-step process: first, learning about funeral service so that you can decide on the type of funeral you want and can afford; second, making the arrangement (the preneed funeral contract including all goods and services); and third, funding the cost of the prearranged funeral through either a regulated trust, life insurance or another method, such as a personal savings or a certificate of deposit account designated for funeral expenses. It is possible to select funeral goods and services without prefunding the funeral and to prefund a funeral without selecting specific goods and services. If you choose either of these options, be aware that the price of the funeral will usually not be guaranteed. Prepaid (Preneed) Funeral Contract In several states, only a licensed funeral director can prearrange funerals. You should check your state law as well as the credentials of the person offering to sell you a preneed funeral contract. If the person selling the contract is not associated with a funeral home, you should ask to see a copy of the agreement between the seller and the funeral home you select to conduct the funeral. A copy of the agreement between the seller and the funeral home should be included with the contract. A preneed contract should clearly state whether the provision of goods and services is guaranteed or not guaranteed. A guaranteed funeral means that regardless of the retail price of the funeral at the time of death, there will be no obligation for the purchaser to pay additional money to the funeral provider. Note that the guarantee may be limited if installment payments are selected as the method of contract payment. The contract should contain a complete description of the goods and services purchased and disclose the current price of the goods and services. If a unique service is requested, you should discuss it in detail with the funeral service professional to determine if the service can actually be provided. A preneed contract should include: Explanation of the rights and obligations of all parties to the contract Relationship between the entity providing the funding and the funeral home Identity of the contract seller, purchaser, and person for whom the contract is purchased Identification and explanation of any required goods or services Specific type of funding plan agreed to Explanation of whether and to what extent the firm guarantees the prices of itemized goods and services in the contract Explanation that if any guaranteed goods or services selected are not available at the time of need that goods or services of equal or greater value will be substituted at no cost Explanation of geographical boundaries of the firm's area of service and under what circumstances the contract can be transferred to another firm or state, and explanation if a transfer or relocation affects funeral arrangement guarantees Explanation of effect of any change in beneficiary Statement of where and how much of the funds being paid to the firm will be deposited until the funeral is provided Identification of who is responsible for paying any taxes on any income or interest generated, when applicable Identification of who will be responsible for paying any additional amounts that may be due at the time of the funeral if prices are not guaranteed in the contract Identification of who is entitled to any excess funds that may result if the income or interest generated by the invested preneed funds exceed the future price increases in the funeral selected Explanation of whether and under what circumstances the preneed contract may be cancelled (revoked) and how much of the funds paid to the firm will be refunded to the buyer Explanation of the effect of missed or late payments. Funeral Service Selections Funeral services are any services that may be used to care for and prepare the deceased for burial, cremation, or other final disposition and to arrange, supervise, or conduct the funeral ceremony or final disposition. These services usually include: the basic, professional services of a funeral director and staff embalming and other preparations (such as hairdressing, dressing) visitation facilities funeral ceremony, memorial service, and/or graveside service hearse/limousine service associated services such as music, grave opening/closing, etc. Funeral goods are the merchandise sold or offered for sale directly to the consumer for use in connection with funeral services. Funeral goods may include: casket urn outer burial container (cemetery vault) associated goods such as flowers, acknowledgement cards, register book, etc. The professional or basic services fee for professional services of the funeral director and staff is in addition to the cost of funeral arrangements and goods that you select. It is the funeral home's cost of doing business. The Federal Trade Commission (FTC) defines this fee as allowable coverage for the basic services of the funeral director and staff, furnished by the funeral provider in arranging any funeral, [including services] such as conducting the arrangements conference, planning the funeral, obtaining necessary permits, and placing obituary notices. It is the only funeral provider fee for services, facilities or unallocated overhead permitted. It is nondeclinable, unless otherwise required by law. The funeral home is required by the Federal Trade Commission (FTC) to provide consumers with a general price list containing the current cost of individual goods and services offered. You may choose any or all of the items that you prefer. The price list must contain disclosures about your right to selection, embalming, alternative containers for direct cremation, the basic services fee, caskets, and outer burial containers. The funeral home is required by the FTC, in addition, to provide consumers with an itemized statement of goods and services selected (the "statement"). It allows you to evaluate decisions and to make changes. The statement must clearly identify any goods or services that may be required and explain why they are required (such as embalming if a viewing is planned); provide required cost information about funeral packages and cash advance items; and include required disclosures regarding legal requirements, embalming, and cash advance items. Cash advance items are goods and services the funeral provider obtains and pays for from a third party on the consumer's behalf, such as cemetery or crematory services, pallbearers, clergy honoraria, flowers, musicians, obituary notices, gratuities, and death certificates. Some funeral providers charge you their cost for these items while others add a service fee to their cost. If a service fee is added or if the funeral provider receives a discount, refund or rebate for the items, this fact must be disclosed to you on the statement. Cemetery arrangements should be discussed well in advance. Some questions you should ask when deciding on a cemetery and a plot are: Are the requirements of your religion met by the cemetery? What restrictions are placed on the types of urns (if applicable), monuments, and burial vaults? Does the price include perpetual care and maintenance? Are there other plots available in the same location to provide for the burial of other family members if that is your plan? Types of Funding Available Trusts Preplanning funds received by the funeral firm may be placed in a funeral trust fund at a financial institution that is authorized in your state to receive trust deposits. Typically, the funds are invested in interest-bearing accounts. Interest earned generally remains in the trust, although a handful of states do permit the funeral firm to withdraw some or all of the interest. Some states also allow the funeral firm to retain a percentage of the funds you pay (usually 5 to 15%) as an administrative fee. It is important to know if all or only part of the money is deposited, especially on non-guaranteed price contracts. In general, administrative expenses, such as trustee fees, are charged against the trust, with some states restricting the allowable amount. If you cancel the contract, the amount of principal and interest that is refunded to you is set by state law. Read the contract carefully and ask the funeral firm about your cancellation options. In many cases, you will be responsible for federal income taxes on the interest earned each year and there may also be state tax liabilities associated with trust funding. Before you sign anything, get all the facts about preneed contracts in your state. LIFE INSURANCE Through this type of funding, the person planning a funeral buys a life insurance policy that is customized for preneed and which directs payment of the death benefit to the funeral home upon death. Most states allow these types of insurance policies, although some do not. It is important to know how much insurance must be purchased to secure a guaranteed price funeral; if the death benefit is adjusted for inflation or if it is level in amount; and if you may be disqualified for coverage due to health reasons. Many policies pay the entire death benefit even if the total premiums have not been paid at the time of death. Death benefit growth in an insurance policy is generally exempt from income tax liability to the insured. Before you sign anything, get all the facts about insurance-funded preneed contracts in your state. SAVINGS ACCOUNTS Savings accounts, sometimes referred to as payable-on-death-certificates (PODs), can usually be set up at local banks and savings and loan institutions. The interest earned over time will help cover any increase in the future price of the funeral. Interest earned is usually subject to income tax. POD accounts are most commonly held in the joint names of the consumer and the funeral home. Upon the consumer's death, the account automatically belongs to the funeral home. Interest rates and the rate of inflation are important considerations. You should determine whether the funeral firm has guaranteed the price of the funeral by agreeing to provide the funeral for the amount in the account or whether the estate or family may be responsible for any shortfall. If the contract does not provide for a guaranteed contract, the estate is usually entitled to any excess funds and is responsible for any shortfall. If the contract contains a guaranteed price, the excess funds usually belong to the funeral home. Jointly-held Certificates of Deposit (CDs) have the same general features to consider. ANNUITIES An annuity is a type of funding vehicle that is more often used in a non-preneed environment. Usually, it provides a stream of uniform periodic payments at specific intervals as retirement income. It is normally used as a means of tax-deferred savings, but it may have specific, limited use in preneed funding. A preneed annuity is paid out as a lump-sum and is technically not a death benefit. State regulations vary, so get the facts before you sign a preneed contract to be funded by an annuity. OTHER TYPES OF FUNDING Although other types of funding may be available, trust funds, life insurance, annuities, and POD savings accounts are the most common. Real estate or personal property may, in limited cases, be transferable to a funeral home to pay for a funeral per state laws. Some states prohibit a creditor from filing a claim against a trust, life insurance policy, or other property designated for funding a funeral. Individuals may have other specific benefits, such as veterans benefits or social security survivor benefits (although there is no longer an automatic death benefit). If you think you may qualify, contact the Veterans Administration and/or the Social Security Administration. And, although the specifics vary with individuals, note that insurance policies, pensions, and other programs may affect the amount of funds available at time of death. Whatever the vehicle used to prepay for a funeral, payment can usually be made in a lump sum or over time. If a trust, savings account, or annuity is used to fund a funeral, a guaranteed funeral is usually not immediately available if payments are made by installment. When insurance is used, the funeral may be guaranteed after one or two years, depending on the insurance policy, even though the payments do not equal the cost of the funeral. If your funeral is not guaranteed, it is important for you to know if the money available at the time of death will be sufficient to pay for the cost of the funeral. EXCESS FUNDS Occasionally, the trust, life insurance policy, annuity, or other investment is more than enough to pay for the cost of the funeral. If funding your contract through insurance or an annuity, the excess would go to the beneficiary named. If funding your contract through a trust, the excess will usually go to the estate. Some state laws specify who is entitled to excess funds that are not used for the funeral. You should ask about regulations in your state and be certain that the preneed funeral contract clearly states who is entitled to any excess. Cancellation and Revocation You will usually be given a limited time in which you may cancel your funding arrangement without penalty. After this period of time has passed, your funding contract will specify any refund to which you are entitled. Moving to another state or area not served by the funeral home or the funding contract may affect the funeral and guarantees. Some states have specific regulations governing where funeral trust funds must be deposited and how transfers may be implemented. For example, many states require burial trust funds to be deposited in banks or other financial institutions within that state. Additionally, the cost of providing the same funeral may vary geographically. A different funeral director may not guarantee the same funeral for the same price. Contract Disclosures Worth repeating: regardless of the funding arrangement you choose, before you sign any contract be certain that you fully understand the funding arrangement and that the following disclosures are part of the contract: 1. The manner in which the preneed funeral contract is funded (trust, life insurance, savings account, annuity, etc.); 2. The relationship between the entity providing the funding and the funeral home; 3. Tax considerations; 4. The existence of any guarantees; and 5. The effects of: Any changes in an assignment, beneficiary designation or use of funds. (Can you change you mind?) Any penalty incurred if you fail to make any required payment or cancel the contract. (Are there cancellation fees? Is there a grace period if you fail to make a payment?) The possibility of not enough money at the time of need to pay for the funeral you have arranged. (Will your estate or family have to pay more money? If there is more than enough money, who gets the excess?) Your relocation. (Can you take your funding arrangement with you or will you have to start over?) Medicaid and Supplementary Security Income (SSI) Some individuals may receive benefits under a state's Medicaid program or the Social Security Administration's Supplemental Security Income (SSI) program. Eligibility for these programs is dependent on the amount of resources (property and cash) that the person owns. In determining the amount of resources, both Medicaid and SSI allow for the exclusion of prearranged funerals, within certain specified limits. Find out what is the current limit. When making your funding arrangement, ask what the impact will be on your funeral arrangement if you ever need to qualify for Medicaid or SSI. Handling the Pre-Planning Appointment Most planning problems arise through misunderstandings, inability to listen or take notes due to emotional or other stress, questions not asked, answers not heard or understood, or important consumer obligations unknown to the seller. A number of important questions to ask at a preplanning appointment are listed below. However, make a list of your own questions before you sit down with the funeral director or other funeral service professional, and obtain answers prior to making any decisions. Picture yourself, pencil or pen in hand, asking these important questions: Does this state require a license or permit to sell these contracts? If so, what is your license number? I understand that each state [except Alabama and D.C.] has a controlling agency that regulates the sale of these contracts. What are the names, addresses, and phone numbers of the enforcement agencies in this state? I'm going to listen to your presentation, but just because I'm quiet doesn't mean I understand it all. Can you stop every five minutes or so to see whether I understand all you've just said and give me time for questions? Could you explain the difference between the standard professional service fee and other services listed later in the contract? What if we need the services of two funeral homes in two different states? Why is there a need for two separate bills? If we change our minds after we sign, what is our time limit in this state to cancel this type of contract? What if we choose to cancel well after the time limit has expired? What happens if the funeral home (or insurance company) goes out of business or is sold? We've gone over a great deal of information today, mostly about the funeral. Is there any other vital information I need to know about possible additional charges, documents I'll need, the cemetery purchase, gravesite charges, or ground or air transportation? Have I asked every question? If I haven't, have you volunteered all the information you need to ensure that my family and I are satisfied? Remember... ...good communication is the first step to understanding. If you are not a good note-taker and want to focus on listening very carefully to the preplanning consultant, have another person in the room take notes and jot down questions. Or, record the entire conversation. That way, both you and the consultant will have a permanent record of exactly what information was discussed. Review the tape to make certain you are aware of what is and perhaps is not contained in your written agreement. Final Funeral Pre-Planning Tips Make sure the plan you choose secures your funds. Make sure your plan is flexible. Get everything in writing. Read and re-read each part of the contract again. Don't sign anything before you understand it. Give copies to your family. Keep a copy in a safe place readily accessible to your survivors (e.g., not in a safety deposit box). This information was obtained from "A Buyer's Guide to Preneed Funeral Planning" Copyright & Copy 1993 by the National Research & Information Center. NRIC is not affiliated with this web site If you wish to contact the NRIC directly, their address is: NRIC 2250 E. Devon Avenue, Suite 250 Des Plaines, IL 60018 1-800-662-7666