The Prepaid Funeral: Advantages & Disadvantages

Written by Kathryn on Jun 10, 2009 filed under Saving Strategies

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

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.
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.
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.
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

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.
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

18 Comments, Comment or Ping

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)?

Jun 10th, 2009 @ 9:19 am
2. FrugalTrader

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

Jun 10th, 2009 @ 9:52 am
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.

Jun 10th, 2009 @ 12:39 pm
4. craig

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

Jun 10th, 2009 @ 5:21 pm
5. Tom @ Canadian Finance Blog

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.

Jun 10th, 2009 @ 6:11 pm
6. BobMarche

Thanks for the useful info. It’s so interesting

Jun 10th, 2009 @ 6:30 pm
7. dave

running out of things to talk about?

Jun 10th, 2009 @ 9:06 pm
8. Ms Save Money

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.

Jun 10th, 2009 @ 10:12 pm
9. MoneyEnergy

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.

Jun 11th, 2009 @ 2:09 am
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.

Jun 11th, 2009 @ 8:42 am
11. Blogging Banks

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..

Jun 11th, 2009 @ 11:04 am
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.

Jun 11th, 2009 @ 11:11 am
13. Annuity Quotes

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.

Jun 11th, 2009 @ 6:45 pm
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.

Jun 12th, 2009 @ 1:14 pm
15. Charles Pedley

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

Jun 13th, 2009 @ 2:04 am
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.

Jun 13th, 2009 @ 9:49 am
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.

Jun 24th, 2009 @ 9:30 pm
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.

Jun 24th, 2009 @ 11:05 pm