Is a Prepaid Funeral Plan Better Than Life Insurance?


It’s no secret that funerals are expensive. In fact, research shows that funerals rank among the most expensive purchases many consumers will ever make. This means, it’s highly important that people find ways to pay the cost, preferably well in advance of ever needing the service.

Most people rely on a life insurance policy to ensure that the cost of a funeral is covered. But could a prepaid funeral plan be just as effective at a fraction of the cost?

What is the Average Cost of a Funeral?

When a loved one passes away, families are faced with a number of difficult decisions. Among them is how to pay their respects in a way that will honor their loved ones. For most, this involves having a lovely funeral.

But the unexpected cost of death is not cheap. In fact, according to the National Funeral Directors Association, the average cost of a funeral in 2009 totaled $6,560 when considering transfer to the funeral home, embalming, preparation of the body, use of the facility for viewing and the funeral ceremony, hearse, service car and casket.

And if a family wants to add a vault to the funeral, the cost jumps to $7,755.

Shockingly, according to data pulled from the Federal Reserve, Census Bureau and Internal Revenue Service, the average American family savings account balance is $3,800, clearly not enough to pay for the cost of a funeral. This means other plans must be made to pay for the high price tag.

The Basics of Prepaid Funeral Plans

Life insurance coverage is a popular choice for individuals and families that want to cover the cost of a funeral in the event that a loved one dies, but many people don’t know that other options exist to help cover the cost of a funeral, one being prepaid funeral plans.

Prepaid funeral plans are typically handled through a funeral provider and allow people to plan aspects of their funerals in advance, including buying the plot where they want to be buried, purchasing the casket and even paying for the full service ahead of time.

This option could not only relieve families of the cost of the funeral, but also remove the worry of wondering whether specifics align with what the deceased would have wanted.

The cost of buying a prepaid funeral typically falls in line with the average cost of a funeral, but varies depending on the purchaser’s preferences.

Prepaid Funeral Arrangements or Life Insurance?

It’s easy to argue that purchasing prepaid funeral plans is a no-brainer, but unfortunately, it’s not that simple. In fact, some have argued that buying them can be downright risky.

The Risks of Prepaid Funeral Arrangements

Reports show that consumers have lost millions of dollars every year after making prepaid funeral arrangements with a provider that mishandled, mismanaged or embezzled the funds. Some providers have even been known to go out of business before the person actually died, rendering the purchase worthless.

While the Funeral Rule created in 1984 was developed to stop funeral providers from taking advantage of consumers by requiring that they offer accurate, itemized price information about funeral goods and services, some features of prepaid funeral plans aren’t covered under the law.

Because there is a risk associated with purchasing a prepaid funeral arrangement, the FTC has created a list of questions to ask before paying a dime.

  • What happens to money that’s been prepaid?
  • What happens to interest income on money that is prepaid and put into a trust account?
  • Are consumers protected if the firm goes out of business?
  • Can a contract be cancelled and a refund issued if the consumer wants to opt out?
  • What happens if the consumer moves to a different area, or dies while away from home?

If you ask the above questions and don’t receive satisfactory answers, it may be time to seek another provider, or look into alternatives.

For instance, it’s possible for consumers to simply make the arrangements for their funerals without actually paying for them upfront. Instead, they can open a payable-on-death account (POD) with a bank that could make a designated person the beneficiary of savings in the account upon the payee’s death.

What About Life Insurance?

It’s also good to remember that permanent or term life insurance are also options to consider. Depending on the type of coverage purchased, the cost over a span of 20 or 30 years could still be cheaper than that of a funeral (the LIFE Foundation estimates that a $250,000 term policy can cost as little as $150 per year).

Not to mention that the beneficiary could receive money for the funeral and additional costs that could arise after death, including unpaid debts and household expenses.

The key to determining which option is best is to begin shopping around for life insurance policies, as well as talking to funeral providers about what prepaid funeral plans actually offer. After weighing the pros and cons of both options, you will be in a much better position to decide which is best for you and your family.