Going my way: The prepaid funeral
By Julie Sturgeon • Bankrate.com

Death and taxes have more than an old cliché in common. Both can cost you a fortune.

According to the United States Senate Special Committee on Aging report in 2000, the traditional funeral in our country averages $7,520, with costs over $10,000 not unusual. One woman ran up a $132,439 tab for her farewell.

So like tax planning, many Americans now arrange their exits as well. Approximately 98 percent of funeral homes offer prearrangement options, says the National Funeral Directors Association, and more than 7 million people have taken them up on the offer. That totals $15 billion prepaid.

Burgeoning business does bring some protections. The Federal Trade Commission's Funeral Rule, for instance, forces funeral directors to bring out a price list on specified items to use during your planning discussions. The NFDA enacted a Preneed Bill of Rights for its members, spelling out the treatment consumers should receive.

But where big dollars are involved, it pays to exercise some consumer savvy. For starters, preplanned funerals aren't for everyone. Those who benefit most are seniors in poorer health or who have been diagnosed with a terminal disease, says Charles Burkhart, owner of Burkhart Funeral Homes in Crawfordsville, Ind. Getting this money out of the estate often leaves these buyers eligible for Medicaid supplements.

It makes sense that people without close kin would be attracted to preplanning, but with today's complicated families, more parents with feuding or unreliable children also explore this route, says John Carmon, past president of NFDA and owner of Carmon Community Funeral Homes in Hartford, Conn.

"There are two tasks at hand when someone dies," says Lisa Carlson, executive director of the Funeral Consumers Alliance. "One is the timely disposition of the body; the other is commemorating the life. When you separate those two, you have many more flexible pricing options."

Preneed decisions
You can orchestrate every aspect of your funeral in a preneed contract, from music to whether the estate pays for a daughter's plane ticket to attend. Most people, however, use this time to select only the casket and calling options.

Prearrangements with cemeteries and monument companies should be made separately, Burkhart advises.

Caskets get complicated. The funeral consumer alliance in San Antonio tells members that anything above $500 represents a 300 percent to 500 percent markup. Keep the funeral home's price list close at hand while you shop.

Batesville Casket, the nation's largest manufacturer, trots out 700 casket designs encompassing 27 shapes and 150 color combinations. Sales brochures display bronze, copper and carbon steel caskets in varying gauges. Then there's mahogany, walnut, cherry, maple, oak, pecan, poplar and pine, with and without protective elements that are supposed to preserve the body after burial.

Forgo spending on these "protective" options, says Carlson, who describes the science behind them as a "a crock pot for a smelly stew." Ditto sealed vaults, which are the first to pop out of the ground and float away during floods.

In liners, crepes are priced inexpensively, velvets the most costly. The color you choose and whether you tailor or shirr that material affects price, too. As if that weren't enough, today's options include everything from personalized cap panels to personalized casket corners.

"I find that preneed customers spend less than a family would at the time of death because it takes the emotion out of the decision," Burkhart says.

And contrary to popular belief, he adds, most families do not upgrade at a higher expense when the time comes to use the preselected items.

"Viewing" means an open casket, generally a more expensive route than "visitation" with a closed casket.

"There is relatively little need to see the body to come to grips with the reality of death in the case of grandma," says Carlson, author of Caring for the Dead: Your Final Act of Love.

Visitation also means the family can hold the memorial service at a church or VFW hall for a lower rental fee. In either case, embalming is not a legal requirement in any of the 50 states, says Carlson, so you can cut corners there as well.

But the No. 1 pitch that catches consumers, she notes, is the travel insurance option, which covers transporting the body if death occurs away from home. Membership in a funeral alliance can cover the need to fly a body home or handle cremation for less than the typical $250 quote.

San Antonio's funeral alliance office suggests this budgeting guideline: Calculate the actual time you think each funeral activity takes, then add an hour or two for behind-the-scenes work for each one. If your cost divided by this total time commitment equals more than $100, this is a high-priced funeral home.

Never buy based on a direct-mail telephone solicitation or an information seminar at the local seniors hangout.

"If someone contacts you about a preneed funeral or cemetery package, they are probably a commissioned sales rep with a quota," Carlson warns.

Burkhart echoes the danger. "There are operators out there who work through a funeral home and, I hate to say it, but they're not exactly legitimate people," he says.

Ways to prepay
In theory, prepaying for this blueprint you just drew up guarantees the family won't see a bill at the time of your death. In reality, the funeral home director guarantees the value of your funeral, says Carmon.

Should family members start throwing in obituaries in The New York Times, there's a charge. If the casket model goes out of date, you get a comparable one at that price level. And if inflation makes that look too shabby several decades from now, the family could shell out to upgrade at those future prices.

According to Carmon, funeral cost increases average between 2 percent and 4 percent annually, so you need a payment vehicle that grows between 2 percent and 5 percent to stay abreast of your choices.

Funeral homes commonly offer two payment choices: an irrevocable trust or an insurance policy. Carlson adds a third option: a payable-on-death Totten trust at the bank, a nifty conveyance that avoids probate tangles. It also allows you to switch the money to someone else's control or designate it for other purposes should you change your funeral plans.

An irrevocable trust held by a third-party can only change the beneficiary to another funeral home, although any interest it earns returns to the family. People trying to get assets off the table to qualify for lower nursing home fees, Medicaid assistance or Supplemental Security Income payments should take this option, Carlson says, and they're least likely to move and stir up a hornet's nest of who-gets-how-much-of-the-trust issues in the transfer.

Consumer advocates sometimes claim insurance policies sold to cover funeral costs are overpriced. Carmon disagrees.

"Even if it's an annuity policy, it must have some discount on it from 100 percent, or it's not really an insurance product," he points out.

This makes insurance an attractive way for younger planners to save $700 or $800 upfront. However, term insurance coverage won't buy you a price guarantee, Burkhart notes, because the funeral home doesn't have an opportunity to build interest along the way.

"They still get the money out of their estate, but if the policy is for $5,000 and the funeral choices cost $6,000, the family pays the difference," he says.

And if you change your mind, the cash surrender clause ensures you lose money when you turn in the policy.

Have you heard the one about the small-town funeral home director who applied the trust money to pay for his mortgages rather than invest it, reasoning he'd honor the funeral arrangements when the time came?

The growing legislative attention on preneed contracts puts the squeeze on this possibility in most states. Most prepayers receive a 1099 each year -- an assurance the money wasn't embezzled. However, you want to insist on getting a growth report from the trustee, says Carmon, and that's not mandatory in most states.

As for any tax implications on the growth, the federal government allows the trust itself to pay those, so you don't need to hassle with the details. Most seniors don't fall into an income bracket where these earnings trigger tax payments, Carlson reminds.

Other vital areas to probe
If you move the plan to another mortuary, what percentage will the original funeral home hold back as an administrative fee? Connecticut caps this cut at 5 percent.

Is my state a 100-percent trust state? If not, the funeral home may legally hold out 10 percent for its current use.

Does my state hold my preplans inviolate? If not, prepaying could give the funeral director more teeth to follow your instructions and stand up to the family members who want to disregard your wishes and blow the cash, says Carmon.

Does my state offer a consumer protection fund to bail out preneed customers in case a funeral director defaults?

Finally, never pay on an installment plan, else you wind up with finance charges for merchandise and services you haven't yet used. Many states, however, allow this practice.

"In the mid-'90s, 53 percent of consumers picked a funeral home that served the family in the past, 33 percent chose the nearest in location, and 11 percent picked a funeral on ethnic or religious affiliation," Carlson notes. "Now people are beginning to shop, and prices are coming down because of it."

-- Posted: Nov. 25, 2002