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If you're trying to be financially responsible and have your
fiscal ducks all in a row, it might seem sensible to sign up for
"pre-need" funeral insurance to (eventually) cover the cost of
your funeral or that of a loved one.
Hold on, though. While it's indeed smart to save for
and to discuss funeral plans and preferences with loved ones,
pre-need funeral insurance isn't a great deal for most of us.
That's surprising, though, if you spend any time reading
communications from those who sell pre-need funeral insurance.
One insurance seller explains:
Preneed life insurance is an insurance policy whose benefits
cover the cost of the predetermined expenses of a funeral,
cremation or burial. The expenses typically include standard
funeral home services, funeral merchandise, church services and
even burial services and merchandise. The purpose of
preneed life insurance is to set aside funds for your funeral,
before the need arises, thereby protecting your loved ones and
your financial assets.
Another stresses that, "By planning now, you can help
alleviate the stress and financial burden of your funeral
arrangements, limiting your loved ones to their emotional
struggles." This vendor also mentions some "key benefits" such as
peace of mind for you and your loved ones, as well as the ability
to "be remembered the way you want."
Nuts and bolts
Pre-need "arrangements," as they're sometimes called, are
typically made with mortuaries, cemeteries, and/or insurance
companies. The benefit of such plans is that, when you move on to
the great beyond, your loved ones won't have many arrangements to
make. They'll be able to focus mainly on mourning, because plots
will have been chosen and paid for, along with the funeral and
burial. So far, so good, right?
Not so fast
The downside of pre-need funeral insurance is that it tends to
cost a lot of money. And that pile of money will be out of your
hands and earning interest -- not for you, but for the people you
Let's say you're aged 75 and you pay $5,000 for a cemetery
plot and $10,000 for your casket and various services. That's
well and good, but what if you're blessed and live another 20
years? You've lost the benefit of that $15,000 for a long time.
If you had invested it and earned 10% per year on it, you'd have
$101,000 to show for it! That would likely be enough to cover any
death expenses -- and leave some shekels to your loved ones as
well. Another consideration is that you might actually
that $15,000 at some point before you die.
Pre-need plans are often nonrefundable -- and often
nontransferable, meaning you can't change your mind or switch
mortuaries. They often have hidden fees, meaning your survivors
could still wind up forking over plenty of money when you die.
Plans can be mishandled, too.
Pre-need insurance has many critics -- even some within the
funeral industry. The New York State Funeral Directors
Association, for example, has a page on its website titled
"NYSFDA is Opposed to Preneed Funeral Insurance," it lists many
reasons for its opposition, including the following:
- "There is great potential to do what is not best for the
consumer because of the motivation to make commissions."
- "These types of small policies are extremely expensive, and
do not grow in order to combat inflation."
- "If the consumer stops paying for any reason, the person
loses all benefits."
- "Preneed funeral insurance is sold in a way that leads our
families to believe that it will completely pay all at-need
costs even though that is rarely the case."
Instead of getting pre-need insurance, you might set up a
. Such a vehicle lets you put money aside for funerals but
offers advantages such as portability, earned interest that can
help keep up with inflation, and no sales commissions. Trusts are
irrevocable, though, and not widely used.
Another option is to simply set up a special account where you
save money to cover funeral expenses. It can be invested in any
way you like and will not be locked into any arrangement.
Ideally, pair that with discussions with loved ones so that
everyone is aware of each others' wishes.
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Think Twice About "Pre-Need" Funeral
originally appeared on Fool.com.
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