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The Prepaid Funeral: Advantages & Disadvantages

There is one guarantee in life and that is we’ll all die. One hundred and fifty years from now the earth will be filled with all new people. That’s a lot of funerals! The funeral industry has huge potential for profit in the next fifty years with a rapidly aging baby-boomer generation. Prepaid funerals are just one of the services funeral homes offer. The question remains, are prepaid funerals worth it?

If you had asked me 10 years ago, I would have said “absolutely not”. In the last several years, having watched a number of people close to us arrange funerals both before and after death, I’ve softened my stance a bit. Let’s consider some of the advantages and disadvantages of the prepaid funeral.

Advantages of a Prepaid Funeral

  1. Growth isn’t taxable – As long as the expenses incurred are for eligible funeral expenses as defined by section 148.1 of the Canada Tax Act, the growth is non-taxable.
  2. Easier to think rationally when not grieving -  It’s difficult to think rationally while making so many decisions within days of losing someone. The deluxe weather treated hand carved maple upholstered casket? You bet! Nothing but the best for Granny. The ninety-five dollar guest book? Not a problem! Being frugal is often the furthest thing on someone’s mind in the aftermath of death. Yet if Granny was frugal herself, is it fair to her and her estate to be caught up in the moment of funeral spending? It’s simply easier to make those difficult decisions while not under so much stress.
  3. The desire of client – Conversely if Granny is worried that you would be too frugal and not give her the send off of a lifetime, this is the opportunity for her to choose what she wants and pay for things just as she’d like them. Many older people worry whether they will have enough in their estate to cover funeral costs. They don’t want to burden their families. For some, even if they have plenty of money, preplanning and prepaying a funeral can give them a great deal of peace of mind.
  4. Easy to get – Buying life insurance for someone in their 80s with major health issues is a challenge. Prepaid funerals, either as an insurance vehicle or as a trust fund don’t require a health screening or age limit to qualify.

Disadvantages of a Prepaid Funeral

  1. They aren’t a good investment - Prepaid funerals make very little financial sense. The interest they generate is minimal. The plan contributor has little control over where or how the money is invested. From a psychological perceptive prepaid funerals have some merit but from a purely financial perspective, they aren’t the wisest choice.
  2. There are scams out there – You will need to:
    • Ensure the funds are held either in an income trust or as a part of an insurance policy at a recognized Canadian Financial Institution covered under the CDIC (Canada Deposit Insurance Corporation).
    • Ensure the funeral home is a licensed funeral provider and is licensed under the Prearranged Funeral Act.
    • Confirm with the funeral home that you can transfer your prepaid arrangement anywhere in Canada.
    • Keep track of the policy and let your family know where it is.

Final Thoughts

Do I think prepaid funerals are a good idea? I still don’t. If you’re looking for tax free growth and think you have a few years, the money would best be put in a TFSA. At least that way, you still have the control over how the money is invested and it’s there when needed. You can still prearrange your funeral so that your wishes are carried out how you’d like.

Yet for many people, prepaying a funeral is a gift to their family. Having the funeral fully paid for and prearranged in the days following a death is one less thing the family needs to worry about in the midst of their grief. Knowing all this, if someone asks about prepaid funerals, I will no longer try to talk them out of it.

What are your thoughts on prepaid funerals?

Kathryn works in public relations and training for a non profit. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Her passions include personal finance and adult education. Kathryn, along with her husband and two children live in Ontario







35 Comments, Comment or Ping

  1. 1. cannon_fodder

    The first thing that struck me was the idea that in 150 years the earth will be filled with all new people – obviously true, but I’d never looked at it that way.

    I guess the ideal situation is to sit down with a funeral director and pick out the details of what you would like and note that down in your will. This way it will be much easier for the people left behind to take care of the arrangements.

    Instead of stating, in an offhand way, “Oh, just a simple arrangement” you could put limits on the expenditure for flowers, the coffin, music, etc. But, unless you go through the process, how would you know?

    And this way, you also relieve the burden, and possible guilt, that your family/friends may take on. Instead of placing them in a difficult position of exactly how much to spend to show their love, you’ve taken care of most of the decisions.

    This way, you can avoid prepaying for the funeral but ultimately achieve a similar goal.

    Finally – does the government provide a $2,500 payout upon a person’s death (I assume once their final tax return has been submitted)?

  2. CF, afaik, there is a $2500 payout upon death. As you mentioned, once the paperwork is sorted.

  3. 3. Novice

    I’ve told my family to donate my carcass to medical school after they’ve hauled out whatever bits are still in working order. They provide a nice little service there for free. And then it’s back to my house for everyone to get wasted and say good and bad things about me. It’s good to Irish sometimes; we throw a good wedding and a better funeral as my uncle used to say.

  4. 4. craig

    Tough subject but you handled it very well and interesting to see how something like this can be handled.

  5. I could see doing this if I was either at an old age or had a terminal illness. While I could die tomorrow, as you mentioned that money would be better off in a TFSA with instructions on what you’d like done.

  6. 6. BobMarche

    Thanks for the useful info. It’s so interesting

  7. 7. dave

    running out of things to talk about?

  8. This is an interesting topic – the Funeral Industry does bank a lot of money on this and you’d be surprised.

    I heard somewhere that a lot of this is owned by the Church. There’s a portion of the pie for you.

  9. Nice, original post – what Craig said; tough subject, but everyone will need to think about it or still be affected by it. Personally, I think about ecological things – is there even enough space on the planet to bury everyone in their own plot if we all died today? At this point I’m still on the fence about all these issues. Eventually I’ll have to think some more about them, though. I know my parents have started paying for some things. I also wrote a piece about how one would/should spend any money that one’s parents might leave behind in an estate.

  10. 10. Kathryn

    Tom: I agree. I would only consider this if I had a terminal illness or was over 70 and even then I might just make my wishes known to my family.

    MoneyEnergy: Great points on the eco-friendly funeral. I’ve noticed eco-friendly options are becoming more popular in the funeral industry.

    Jas: You’re right. There is a lot of money to be made in the funeral industry or in the retirement / aging business in the next three few decades. It’s not the line of work I’d want to work in but for those who would enjoy it, it would be a profitable business in the years to come.

    Novice: The best use of your remains! Sounds like a great way to celebrate your life.

    Dave: There is very little information on the prepaid funeral in Canada that isn’t written by a funeral home which creates obvious bias. Lots of different demographics read MDJ. So, no, we’re not even close to running out of things to write about.

  11. Hmm, wouldn’t it be easier simply to invest in a funeral home? With the rapid ageing of the population in the western world, investing in funeral homes sounds like a growth investment to me..

  12. 12. Julie

    One aspect I don’t think has been touched on is that you freeze the cost of the funeral.. My mom who has chronic cancer pre-paid her funeral and it has given her tremendous peace of mind to know that arrangements are in place.

  13. If ever you were to be on Medicaid – they will only allow so much toward funeral expenses depending on the state. It is a good idea then to have a fully funded irrevocable funeral trust then.

  14. 14. Madame X

    I’ve been looking into this at the request of my parents. I think it’s best not to pre-pay, but to leave instructions about what you want so loved ones will be able to take care of it. Also look into Funeral Consumers Alliances that exist regionally– they survey funeral homes and provide transparency on pricing.

  15. There is a clause in any prepaid funeral that I am aware of that says in legalese terms to make it confusing that the funeral home may increase the fee cost at the time of the funeral if not enough money in the plan to provide for the requested funeral. That leaves it so open-ended that it is NO gift to your family because your family may be stuck paying the extra.

    Much smarter is to get a term life insurance policy when you are young enough that will bury you when you die.

    Consumer reports has researched pre-paid funerals and are dead-set against them because of many drawbacks like the one I described.

    If you are too old to afford a term life insurance policy to provide death benefits, then buy an escalator GIC which will give you more money if kept to 3, 5 or 7 years and give orders to keep rolling it over into another one to keep it growing.

    IN your will, you designate that GIC or whatever to cover funeral costs.

    Amazon.com has some books about the horrendous troubles people have ended up with due to prepaid funerals. I would not touch one with a ten-foot pole [or even a ten foot Canadian! (:-)

    Here the AARP, similar to our CARP warns against prepaid as a scam.

    http://www.aarpmagazine.org/money/funeral_rip_off.html

  16. 16. cannon_fodder

    Charles,

    Thanks for the link. Quite illuminating. Another example of what happens when the government is lax how too many people will let greed take over and prey on others.

  17. 17. ian calderwood

    I recently went thru the process of arranging a funeral that had a prepaid service, cremation, etc. There is another side to prepaid funerals that one should not overlook. In my case, the deceased was very specific-low cost with as many assets as possible going to the estate. The process was interesting. The funeral director walked me thru the sales room to view caskets. I declined, thinking very much that the deceased had selected carefully-budget was not the issue. Next, it was a conversation about a very expensive urn. No sale. Pre-arrangement took all the the ‘potential guilt’ and pressure away from me for selecting the options that I did-essentially the thank you card, minister, etc. Looking back, it was a snap, I was out of there in 30 minutes. We have decided to do this for ourselves-notwithstanding the ROR on our money because ultimately we believe it will save our estate upsells/money at ‘that’ time and the emotional pressure of starting from the beginning of the process as it were.

  18. 18. Kathryn

    I have to agree with you Ian. It’s the most common thing I’ve heard from families that have dealt with prepaid funerals. The decisions are easy and guilt free with they’ve already been made. The money saved from ‘up-selling’ during an emotionally fraught time may well be worth the other costs lost.

  19. 19. Sara

    Donating your whole body to science is a NO cost, pre-plan option, that takes all the stress and cost out of making arrangements following a death. The companies that offer this also encourage a ‘pre-death donation’ agreement. Another benefit is the ‘eco’ agenda – as with body donation (to Science) you are actually giving a gift back to humanity.

    Although I believe this is only available in the US at present and not Canada.

  20. 20. Rick

    In my case my parents are both over 80. The impact of the HST which is effective July 1/10 adds several hundred dollars in cost to even the most modest funeral. I am considering whether to beat Dalton out of a few bucks because the return in my situation is pretty good.

    Not sure if its true but the guy on CBC recently stated that an “average $5,000 funeral” will get an $800 wack courtesy of Dalton and the HST.

  21. 21. DW

    bought a life policy from assumption life called golden protection plus
    it pays 3% a year on amount insured, this is better than the TFSA because it grows on a principal I did not have to provide.
    When death occurs it pays out the principal amount insured plus the 3% for every year it was in force tax free.
    I have not seen a better one than this, especially since its what they call imeadiate issue with no medical. The one’s you see on tv make you wait 24 months before you can get the full amount.

  22. 22. Bill Shields

    Hello Kathryn: i appreciate most of your blog on prepaid funeral issues. You have made some good points and have addressed several of the key issues. I have been a funeral director for over 20 years, taking 2 of those years to work in the investment and insurance industry. It does bother me that one again, as I repeatedly witnessesd in my two year stint, the investment advisors are NOT completely arware of the products and benefits available. I liked how you have encouraged people to make sure they are dealing with the right people and companies, but your advice on the TFSA I feel is poor at best, and if the right preplanned product was used, the TFSA would NOT be a better choice for several reasons, too difficult to answer in this small spot. I can tell you in the almost 25 years of my career, the preplanning process has never hurt anyone…that is a pretty good track record and reason to consider it. Thank you for your input and for the opportunity to comment. I am pleased to see you are becoming more “preplanning friendly.” Bill Shields

  23. 23. Bill Shields

    Second Note to all readers re: CPP Death Benefit

    The lump sum death benefit from CPP is only available to someone who has contributed to CPP and is based on their contributions through their working life, not to everyone as many expect it to be. The maximum benefit is $2500. The eligable person may receive a benefit UP TO $2500 The benefit is payable to the Estate of the person who has passed away and contributed. With the benefit being paid to the estate is therefore a taxable income to the estate, therefore, the full benefit is seldom realized. The time of return is approx. 8 – 10 weeks on average from time of placing the application.

    Bill Shields

  24. 24. Camille

    Re: Bill Sheilds is correct so BEWARE in regards to the CPP Death Benefit:

    The deceased had to contribute into the fund for 11 years MINIMUM( I have seen people declined who missed the mark by one week or even a few days as the law is the law). So, for example those who were stay at home Mom’s will not qualify if they did not contribute to CPP for 11 years and again 2500 is the max; Odds are you will probably receive alot less.Therefore, you cannot depend on CPP Death Benefit.Plus, being that it will take 8 to 10 weeks to receive anything youor your family will need to pay the funeral home as they will not wait 8 to 10 weeks for payment. After all you don’t go to McDonalds order a meal and tell them you will pay them 8 to 10 weeks from now. Shockingly, they don’t go for that.

  25. 25. Daniel Wybo

    Re: Bill Sheilds is correct so BEWARE in regards to the CPP Death Benefit:

    It is my understanding that the CPP Death Benefit maximum is based on a multiple of 6.

    In other words if the CPP recipient receives only a $100 a month in income, their death benefit will only be $600 ( 6x$100=$600.Death Benefit
    $200 a month x6 = $1200 Death Benefit
    $300 a month x6= $1800 Death Benefit
    $400 a month x6=$2400 Death Benefit
    $416.66 a month x6= $2500 Max

    Therefore its possible to calculate the actual amount of death benefit based on whether you get more than $416.66 per month on CPP.
    If you get more than $416.66 per month you qualify for the maximum Death Benefit of $2500.
    If you get less than $416.66 per month you qualify for the Death Benefit however it will only be a multiple of 6 times your actual CPP income benefit.
    People who don’t get any CPP will not be eligible for the Death Benefit.
    There is a lot of misinformation and one should consult SERVICE CANADA for clarification.

    One thing is for sure , the CPP Death Benefit will not be even close enough to pay for ones final expenses.
    A preneed supplemental plan , like the one offered by The Canada Purple Shield will cover those expenses not paid by CPP Death Benefit.
    The Purple Shield Plan is low cost and offers $1000 to $15000. The plan grows tax free and is accepted by Funeral Homes throughout Canada .

  26. 26. Charlie

    I think the biggest bonus of a prepaid funeral is the guarantee of the cost of services that most funeral homes offer as a standard to their client families. I have seen what my TFSA has done for 7 years and I also see what a funeral has increased by over the past 10 years. I think I’m happy with the prepaid funeral decision. I also have to express my pleasure with someone finally pointing out that the CPP death benefit isn’t automatic the one thing I would have mentioned is that when a couple is splitting CPP credits because the one spouse is getting very little doesn’t mean that the spouse who was being increased is going to get more of a death benefit.
    Did you know what cost of a funeral will roughly double every 10 years so if you can afford it you should be starting a plan with your funeral home most offer programs that allow you X number of years to pay for the funeral with the added benefit that should you die before the balance is paid you or your family isn’t responsible for any difference between deposits paid and the total funeral cost.
    i would also take the thought above a little further… tomorrow go into Future Shop and tell the associate that you need a new TV but you don’t need it for 25 years but you will give them todays price and pick it up in 25 years and see what they say. when the local funeral home is encouraging you to do what i just suggested and a lot of people don’t think for some reason it is worth it to do.

  27. 27. lifeline

    Is the prepaid amount and cost actually frozen, as one person states in June 11, 2009? As I understand it, the costs increase due to inflation, therefore the funeral home can charge you whatever they feel their costs are, and I feel that area becomes the ‘black hole’ of overcharging clients.
    Also, as funeral homes are often dealing not with one person, but with several family members, the costs can get lost in the system, and the family is just required to pay the number that is spat out at the end.

  28. 28. Lynn

    Note to Charlie (#26) – The TFSA was launched in 2009 — not quite 7 years yet, so it may not be performing as badly as you think.

    Prepaid funerals are fine if one is sure that there will be someone left to administer same. When an elderly relative passed away, she was on the “outs” with her immediate family (daughter-in-law and grandkids), and her one remaining sibling was himself at death’s doorstep. Although she had prepaid her funeral, with provisions for viewing, an organist and service, the burial was a streamlined affair. The executor approached the funeral home for a refund on the unused portion; I am unaware of the outcome.

    That said, I believe that pre-arrangement with at least an outline of one’s obit (it’s amazing how relatives and in-laws can take offense if they are left out), family ties, life’s achievements, as well as burial preference (cremation or casket), visitation, in order to relieve the stress associated with the death of a loved one.

  29. 29. Trisha

    Great topic.
    I’ve had to arrange 2 funerals in my life. Sadly, both came as total surprises, leaving a lot of very important desisions to be made, at a time when no one was in any condition to do that.
    First – I will confirm, there is an automatic CPP death benefit and most funeral homes will assure you of that and then require that you sign an ‘Assignment of Benefits’, signing that cheque over to them. They then bill you for the amount over and above the benefit, but be prepared. The costs are so atrocious, they border on offensive, but really, who wants to ‘dicker’ with a funeral home? Even if you’re emotionally up for it, it just doesn’t feel right.

    Everyone, regardless of age, should think about this topic and have the conversation to make sure their loved ones know their wishes. It could save a lot of discomfort and even family disputes. Imagine your loved ones arguing about funeral arrangements. Or as happened to me, we found a document several weeks later, which would have significantly changed how the arrangements were set up, but no one knew it existed and so we now live with the memory of not having provided what they wanted.

    If you think about it, you only get 1 funeral and it really should be a refection of the life you’ve led and the person you were, not whatever the funeral director on duty at the time, thought to suggest.

  30. 30. Trisha

    Also .. to clarify some of the comments above. One does NOT have to on CPP benefits to receive the ‘Death’ Benefit. One receives it when a spouse or next of kin passes. Anyone who is a Canadia Citizen and who has paid CPP benefits is awarded the basic Death Benefit and it is paid to their next of kin. Some funeral homes will still bury a person for that ‘amount’, ensuring that those less fortunate are always given a decent funeral and burial.

  31. 31. chrissy

    Just found out today for myself, That a prepaid funeral means…. NOTHING! the costs are not frozen….for example, my grandma paid $450 to have the hole dug for her casket…todays cost is $1050.00… which we are responsible for the difference after any “Interest” has been appied to it… the only “guarantee” is the Casket and service are paid for. All through the paper work is the word..”ESTIMATED COST”… which of course means… no guarantee. Cpp is applied to any outstanding balance… I brought up the fact of this being a “contract” signed by my grandmother in 2004… why is not Binding? Answer….”the word ESTIMATE!!!!!!! what a croc.

  32. 32. Lynn

    That is indeed distressing, chrissy. However, if the funeral home and cemetery are two separate entities (with different ownership), then it could be that the prepaid, prearranged portion only covers the services provided by the funeral home (which is why the other listed costs are only “estimates”).

    Are you sure that the pre-payment actually covers the burial?

  33. Assuming we are going to die at some point why not permanent life insurance.
    There is no real limit like the TFSA It grows tax free and is guaranteed.

    If you get the good stuff it grows so extra money can be left to children partner etc.

    One can also spend an enjoy the the money using the insured annuity idea I wrote a few years ago.

    http://www.milliondollarjourney.com/how-annuities-work.htm

    Cheers,

    Brian

  34. 34. Lynn

    Be careful & aware…I prepaid for my funeral with instructions plus separate clause, and gave extra to go to daughter to spread ashes where I requested.
    I then moved and transferred my prepaid to a funeral home in New town. Recently, through the funeral Home, I learnt that if policy is 1 3 or even 5 years since purchased the cost could have risen 5 – 20 times what I paid, and even though clause in it states the amount to go to daughter for my disbursement of ashes, I was told they could keep any or all of it to cover the risen cost. I do not know the laws on this but believe as it is a separate clause that that portion amount stated plus interest on it should not be touched by funeral home but given to my daughter, as stated. Any higher cost yearly I feel ( increased costs for what I require ) should be in writing sent to myself so I may cover costs now and not leave any burden to my daughter, who cannot afford this herself. Is this a possibility as funeral home would not discuss it with myself instead opting out saying had another appointment to deal with brushing me aside. Please advise & thank you

  35. 35. Carol

    Well I checked what my dad paid for a 4 casket funeral plot nowadays. He paid $400 years ago now it’s a fortune. Just goes to show real estate is a good investment.
    I thought maybe the growing costs of funeral services could offset the smaller financial growth while the money’s in trust.

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