Pitfalls of Prepaid Funeral Contracts

Once primarily used by lower-income families, prepaid funerals are gaining popularity across all consumer levels, including the wealthy. Some top reasons for using prepaid plans include:

• They can lock in today’s prices and acts as an inflation hedge
• They spare family members the burden of planning and paying for a funeral
• They provide a good way for people to spend down assets so that they can qualify for Medicaid coverage

However, there are many abuses in the prepaid funeral industry, creating a need for stricter regulations. Some potential drawbacks of prepaid plans include:

• Even guaranteed plans don’t protect against unexpected bills
• Many plans exempt certain items such as flowers and music
• Changes or upgrades can void the price guarantee
• Getting out of a prepaid deal is complicated and many fees are imposed
• Some operators engage in fraud, costing unsuspecting investors a lot of money

State and federal lawmakers have begun to fight back. Texas, New Jersey, and Washington have all passed legislation to help protect consumers. To avoid the potential pitfalls of investing in a prepaid contract, set up a pay-on-death account or a trust. These methods will produce the same result without all the risk.

See Anne Tergesen, When Prepaid Funeral Plans are Wealth Killers, WSJ.com, May 22, 2010. 

Special thanks to Jim Hillhouse (Wealth Counsel) for bringing this to my attention.