Preneed funeral insurance and funeral contracts

Preneed funeral insurance is a life insurance policy, usually small, that you buy to prepay a funeral and then assign to a specific funeral home. At your death the insurer pays the funeral home, which provides the goods and services in your contract. The FTC Funeral Rule requires funeral providers to give you clear price information, but it does not set the rules for how prepaid money is held; those come from state law, so the protection you have depends on where you live and how the plan is funded.

Two ways to prepay

A preneed contract has two parts: a funeral purchase agreement with a funeral home (what you picked and what it costs) and a funding method. The funding is either:

• A trust. The funeral home or a third party places your payment in a trust, and the money is released at your death. States set how much must go into the trust and how it is monitored.
• Insurance. You buy a life policy, often whole life with a single or limited premium, and assign it to the funeral home, which becomes the payee. Because the policy is a regulated life insurance contract, the state insurance department oversees the insurer, and your state's guaranty association may protect the policy if the insurer fails (check the state guaranty association coverage lookup).

Preneed insurance is sold by funeral homes, funeral-home-affiliated agents and independent insurance agents. Do not confuse it with cash final expense coverage. The key difference is who receives the money; see burial insurance vs final expense vs preneed.

What the FTC Funeral Rule does

The Funeral Rule, enforced by the Federal Trade Commission, applies to funeral providers: businesses that sell both funeral goods and funeral services. In short, it gives you the right to:

• Get prices by phone. Providers must give you price information over the phone if you ask.
• Receive a General Price List. If you visit in person to discuss arrangements, the provider must hand you a written, itemized price list to keep.
• Choose only the goods and services you want. A provider may not require you to buy a package when you can buy items separately, with limited legal exceptions.
• Use a casket or urn bought elsewhere. A provider may not refuse to handle it or charge a fee for doing so.
• Receive an itemized statement before you pay, showing what you chose and the total.
• Be told that embalming is generally not required by law except in certain circumstances.

These rules matter for preneed because a prepaid contract is a funeral purchase. You are entitled to the same itemized price information before you commit, and you can use it to compare homes. What the Funeral Rule does not do is set trust rules, refund rules or insurance standards for a preneed contract. For those, look to your state's funeral board, attorney general or insurance department.

What to check before you sign

1. Get the General Price List first and compare at least two or three funeral homes. A cheaper plan at a home you would never use is not a bargain.
2. Ask whether the contract is guaranteed or non-guaranteed. A guaranteed contract promises that the listed goods and services will be provided with no extra charge. A non-guaranteed contract may only credit a dollar amount toward the funeral, leaving the family to pay more.
3. Ask who holds the money. Get the name of the trustee or insurer in writing. For an insurance-funded plan, look up the insurer's financial strength and your state's guaranty coverage.
4. Ask about portability. If you move or the funeral home closes, can the plan transfer to another home, and at what fee?
5. Ask about cancellation and refunds. Some states let you cancel and recover your payment; others limit refunds on irrevocable contracts. Ask whether administrative fees apply.
6. Ask what happens to leftover funds if the funeral costs less than the contract.
7. Ask what is not covered, such as cemetery fees, opening and closing the grave, flowers, obituary notices and clergy honoraria. These third-party charges are often excluded. The what a funeral costs and how families pay for it guide lists them.
8. Use the free-look period. For an insurance policy, the the free-look period: returning a policy for a refund lets you cancel for a refund within the state's window.
9. Tell your family. A prepaid plan that nobody knows about may be ignored, and the family may pay twice. Give them the contract and the funeral home's number.

A worked example (hypothetical)

Say a couple in their 70s asks about a $9,000 prepaid plan at a local funeral home. The funeral home's agent suggests paying $60 a month for 15 years through an assigned insurance policy.

• Total premiums: $60 x 12 x 15 = $10,800, which is $1,800 more than the $9,000 funeral price. The extra reflects the cost of insurance and interest over time.
• If they die in year three after paying about $2,160, the policy may pay a reduced amount under a graded schedule, or the contract may only cover part of the bill. They must read both documents.
• If they move in year six, the plan may transfer to a new home only after a fee, or the funeral home may keep a portion.

A couple with $9,000 in a bank account earmarked for the funeral would not have that problem. They would lose flexibility only if they spent the account. This is a comparison to think through, not a market quote.

Medicaid and preneed

Some states treat irrevocable prepaid funeral arrangements as exempt from the asset limit for Medicaid long-term care eligibility, and some do not. The rule is state-specific and changes. If you may need Medicaid, ask the state Medicaid agency or an elder law attorney before buying, and read medicaid eligibility and life insurance cash value.

Warning signs

• A salesperson who says the price will rise unless you sign today.
• Pressure to name the funeral home as your beneficiary without explaining that the money cannot go to your family.
• A refusal to give you the written contract or the General Price List.
• Claims that preneed is required by law. It is not.
• Payment demands by wire, gift card or cash only.

If something goes wrong, contact the funeral home first, then your state's funeral regulator or attorney general, your state insurance department for an insurance-funded plan, and the FTC.

Key takeaways

• Preneed funeral insurance is a life policy assigned to a funeral home, which receives the money and provides the funeral.
• The FTC Funeral Rule gives you price lists, phone quotes and the right to choose items separately, but states regulate how prepaid money is held and refunded.
• Ask whether the contract is guaranteed, who holds the money, and whether you can cancel or transfer it.
• A cash policy or savings account gives the family more flexibility, while preneed locks in decisions.
• Tell your family and keep a copy of the contract where they can find it.