Pre-Paid Funeral Plans: Buyer Beware

Funerals rank among the most expensive purchases many consumers will ever make. A traditional funeral costs about $7,000, although "extras" like flowers, obituary notices, acknowledgment cards and limousines can bring the total to well over $10,000. Moreover, people often "overspend" on a funeral or burial because they think of it as a reflection of their feelings for the deceased.

To help relieve their families of some of these decisions, an increasing number of people are planning their own funerals, designating their funeral preferences, and sometimes even paying for them in advance. In fact, many elder law attorneys advise prepayment as a way to invest in assets that will not be countable by Medicaid or SSI.

However, consumers lose millions of dollars every year when pre-need funeral funds are misspent or misappropriated. A funeral provider could mishandle, mismanage or embezzle the funds. Some go out of business before the need for the pre-paid funeral arises. Others sell policies that are virtually worthless.

Consumers received some protection from unscrupulous funeral providers with the creation of the Funeral Rule in 1984. This rule, administered by the Federal Trade Commission (FTC), requires funeral providers to give consumers accurate, itemized price information and other specific disclosures about funeral goods and services. Unfortunately, the Funeral Rule does not apply to many of the features of pre-need contracts, which are governed solely by state law, and protections vary widely from state to state. Some state laws require the funeral home or cemetery to place a percentage of the prepayment in a state-regulated trust or to purchase a life insurance policy with the death benefits assigned to the funeral home or cemetery. Other states, however, offer buyers of pre-need plans little or no effective protection.

Following are some questions that the FTC recommends asking before signing up for a pre-need funeral arrangement. The questions are from the FTC's Shopping for Funeral Services page.

• What happens to the money you've prepaid? States have different requirements for handling funds paid for prearranged funeral services.
• What happens to the interest income on money that is prepaid and put into a trust account?
• Are you protected if the firm you dealt with goes out of business?
• Can you cancel the contract and get a full refund if you change your mind?
• What happens if you move to a different area or die while away from home? Some prepaid funeral plans can be transferred, but often at an added cost.

In addition, find out exactly what you are paying for and compare with other funeral providers. And make sure the price is locked in and additional money won't be required at the time of death.

These pitfalls can be avoided, of course, by making decisions about your arrangements in advance, but not paying for them in advance. Be sure to tell your family about the plans you've made; let them know where the documents are filed. If your family isn't aware that you've made plans, your wishes may not be carried out. You may wish to consult an attorney on the best way to ensure that your wishes are followed.

One way to ensure there is money available to pay for the funeral is to set up a payable-on-death account (POD) with your bank. Make the person who will be handling your funeral arrangements the beneficiary (and make sure they know your plans). You will maintain control of your money while you are alive, but when you die it is available immediately, without having to go through probate.

Sometimes it's more convenient and less stressful to "price shop" funeral homes by telephone. The Funeral Rule requires funeral directors to provide price information over the phone to any caller who asks for it.

If you run into problems or have questions about your state's laws, most states have a licensing board that regulates the funeral industry.