No one wants to think about his or her death, but preparation in the form of a prepaid funeral contract can be useful in more than one way. A prepaid funeral contract allows you to purchase funeral goods and services before you die. Contracts can include payments for services such as embalming and restoration where the decedent is Catholic or Protestant; for body washing and watching where the decedent is Jewish; and various other services for other religions. Contracts can also cover use of the funeral home for visiting, a place for the funeral service, purchase of a casket, vault or grave liner; cremation, transportation, permits, headstones, death certificates, and obituaries, among other things.
Pluses and Minuses
+ Making advance arrangements can take the burden off your loved ones who would otherwise have to make arrangements at a time when an unexpected loss might cloud their thinking and cause them to spend based on emotion and without clear thinking. From time to time, I hear families say they spent more on a funeral than was really necessary simply because the death of their loved one was unexpected, they were “under the gun” in having to make arrangements, and they did not have enough time to consider their options.
+ Selecting a cemetery and plot location is not something to be done in a hurry. There are many considerations to take into account and not enough time to think things through when a decision has to be made in one or two days. Where a cemetery is controlled by a religious organization, it may not be easy to get in touch with the right person on the spur of the moment.
+ / - One benefit of a prepaid funeral contract is that you are paying now for a service that may increase in price—possibly saving your family money. If the contract provides inflation protection you itemize what you are purchasing, and you get those goods and services even if prices rise by the time of your death. This may sound too good to be true, and maybe it is. There was a time when inflation provisions were common. That was when prepaid funerals were set up through a funeral trust, and the trust earned enough interest annually to afford inflation protection. This benefit is no longer offered through funeral trusts so that what you pay for is not necessarily what you get. I have known of families who have cut some goods and/or services from the prepaid contract without having any misgivings.
- If you enter into a contract directly with a funeral home, and the facility goes out of business or goes bankrupt, you might very well lose your money. Be cautious when making such arrangements. You are better off dealing with a funeral director who will help you sign up with the CHOICES program sponsored by the New Jersey Funeral Directors Association. It is a well-managed non-profit organization that provides many benefits to its customers, and it provides a wealth of information to the public through its website. The funeral director does not receive any payment for signing you up. OF course, he or she hopes that his/her/their services will be used when the time comes. This type of contract may be used for funeral services at any facility and in any state.
- You probably can do better investing your money if you do so wisely, as long as you understand that your funds may be tied up after your death. Even a short delay can be a problem. However, most funeral homes are flexible enough to work with families when they know there will be funds available sooner rather than later.
- You can purchase life insurance to fund a funeral and not have to tie up a large sum of money. Leaving detailed instructions for your funeral and disposition of your remains can substitute for a prepaid plan.
Pre-planning for Medicaid is Different
Medicaid applicants must spend down their available assets until they reach the qualifying level of $2,000 in New Jersey ($3,000 if both husband and wife or both domestic partners will be on Medicaid together). By purchasing a prepaid funeral contract, you can turn available assets into an exempt asset that won't affect your eligibility. In order for a prepaid funeral contract to be exempt from Medicaid asset rules, the contract must be irrevocable. That means you can't change it or cancel it once it is signed. In New Jersey, Medicaid-qualifying prepaid funeral arrangements are made with a company that holds the prepaid funds in Trust and is in compliance with Medicaid regulations (such as CHOICES, referred to above).
The pluses and minuses outlined above do not usually apply in Medicaid situations because the Medicaid-qualifying contract is entered into when the applicant is already in a nursing home, is spending down to $2,000 in anticipation of qualifying for Medicaid benefits and does not have a lengthy life expectancy. The whole idea is to preserve funds for the funeral. Absent such a contract, it is possible that all of the individual’s assets will be spent on long term care leaving him or her with only $2,000, which does not buy much in terms of a funeral.
The timing of purchasing a pre-paid funeral is important. For married persons and domestic partners, the spend-down involves taking a financial snapshot of the assets as of the first day of the month in which the Medicaid applicant entered into institutional care. Assets are then divided in half (subject to the limitation of assets that can be retained by the well spouse). From the Medicaid applicant’s share there many expenses can be paid to hasten qualification. One of these items is arranging for a prepaid funeral for both spouses or partners. Most people are pleasantly surprised when they learn how beneficial the spend-down can be. For single people, and even for married couples who fail to take advantage of the financial snapshot, an irrevocable prepaid plan can be purchased any time before the proposed Medicaid eligibility date - - and a revocable plan can easily be converted at any time before the proposed Medicaid eligibility date.
On balance, prepaid funerals are essential for Medicaid planning purposes. For younger individuals, and for seniors in good health, there may be better options.