Types of Funding
It is very important to discuss funeral plans and prefunding details with your family. If you choose to prefund a funeral, select the payment option that best meets your specific needs. The following options are commonly available to fund a funeral in advance.
(The National Funeral Directors Association [NFDA] does not endorse any type of advance-funding arrangement, company or product. This website is for informational purposes only to help consumers make decisions about their advance-planning options.)
Trusts may be used to prefund funerals in most states in accordance with specific state laws. Depending on the type of trust, it may be managed by the funeral home, cemetery, a bank, a state association or the state itself. Funeral trusts may or may not be guaranteed to keep up with inflation for a specified period of time. With a guaranteed, fully funded trust, there generally is no balance due at the time of death. If a trust contract is not guaranteed or fully funded, there may be a balance due to the funeral provider at the time of death. Trust proceeds are usually taxable to the purchaser. If you are unclear about your trust protection, discuss your state’s trust funding laws with the funeral provider or a state regulator. State laws vary.
A form of whole life insurance, preneed insurance products may be used to prefund funerals in most states in accordance with state laws. The consumer purchases a specialized insurance policy that has growth value, meaning that the face amount or death benefit will increase over time to pay for funeral costs at time of death. Preneed insurance may be paid by a one-time cash premium with no further premiums due for the term of the contract, or by installment. Policy growth and the payout amount are not taxable to the purchaser. If you are unclear about your preneed insurance protection, discuss your state’s preneed laws with the funeral provider or a state regulator. State laws vary.
Other Funding Options
Payable-on-death (POD) accounts may be established in some states for the purpose of paying for funerals, often when death is imminent. Typically, a POD is held jointly by the consumer and the funeral home. Upon the consumer’s death, the account automatically goes to the funeral home. POD accounts do not guarantee that a funeral will be paid for in full – the family or estate is responsible for any shortfall.
Certificates of deposit (CDs) or savings accounts, jointly held with a family member who has “right of survivorship,” provide funeral benefits similar to a POD account, with the funds passing to the joint owner outside of probate.
Private trust funds for the purpose of paying for a funeral are established by some individuals at their own banks.
Savings accounts or life insurance are existing assets that may be earmarked in advance for funeral costs. However, you must ensure that your family and attorney have been informed and that provisions are made to access the funds upon your death. In most states, you are allowed to assign the benefits of an existing life insurance policy to a funeral home.
Annuities may, in some circumstances, be adapted for preneed, usually for individuals of advanced age or with chronic health problems or in other circumstances.
With all of the above types of funding, state laws controlling what is allowed and disallowed vary, including how excess funds, if any, are handled.