Hidden risks of prepaid funerals

prepaid funerals

Prepaid funerals may seem like a great deal for older investors, but you need to know about the hidden risks

For example, a member of Inner Circle recently asked whether there is any advantage to spending money on prepaid funerals. So you can get a sense of how the service works, I’d like to share this question, and our answer, with you. I hope you enjoy and profit from it. In 2016, as we continue to witness the biggest transfer of wealth from one generation to another, it’s information we all need to have.

Q: At 57 years old, it seems reasonable to me to lock in funeral costs at today’s prices and pay for it now. This makes even more sense since I can reasonably expect to live another 25 years. Funeral costs for any level of funeral have doubled every 10 years over the past 30 years, according to the brochure. Does this make sense to you?


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A: This sounds like a consumer decision, but it’s really an investment decision, as well. When you prepay for a funeral, you are investing money in a highly specialized fixed-return investment. You pay now, and get a fixed return (consisting of preselected funeral services) at an indeterminate point in the future—the few days or weeks after your death.

Prepaid funerals may limit your options—or those of your loved ones

The one advantage you get by investing money in a prepaid funeral is that you fix the cost. However, it’s easy to spot a number of disadvantages.

For instance, you don’t get any return on the money you’ve paid, though the funeral home (or the insurer) may hold your money for decades. Depending on the plan, you may be stuck with your initial choice of funeral home, even if its service has deteriorated. You may also be stuck with your initial funeral plan, even if it’s hopelessly out of date in relation to community standards or the personal circumstances of you or your survivors.

Knowing that you are largely a captive customer, the funeral home may drive a harder bargain on related services than it would if it had to win your business as a new customer.

Funeral prices may not rise as much as you expect

When investing money or making a major purchase, it’s best to look beyond what it says in the marketing brochure. Remember, common sense alone can only take you so far. You need to base common-sense decisions on all available common knowledge. For instance, even if funeral costs have doubled every 10 years over the past 30 years, the rise may be due to special factors.

It may partly reflect the rising disposable income of the past 30 years. It may reflect a change in the ethnic mix—some nationalities prefer more elaborate funerals than others. It may reflect rising costs due to environmental regulations, or rising labour costs due to a shortage of qualified personnel. These and other cost-boosting factors may not all apply equally in the future, or at all. Some may reverse. What happens if you move? You may feel the urge to plant your roots in a warmer climate. Will you be able to redeem your prepaid funeral if you live in a different, province, state or country?

Before you prepay for a funeral, ask yourself if you’d buy other sorts of fixed-return investments from the same company, such as a long-term bond. If you can’t depend on the company to do something as simple as repay a loan, then why trust it to carry out your last wishes?

What prepaid funerals can teach you about long term investing

The topic of prepaid funerals brings up the age old investing topic of having a healthy dose of skepticism when you encounter new investment products. Most seasoned investors will talk about the value of everyday qualities like patience, consistency and a healthy sense of skepticism—in short, the kind of qualities that bring success in all aspects of life, not just investing.

This investing mindset is the perfect way to deal with the idea of prepaid funerals. Being able to think critically about an investment product and knowing how money is being made on both sides is crucial to making an informed investment decision.

These qualities also help you apply our three-part formula for investment success: invest mainly in well-established, high-quality companies; spread your money out across most if not all of the five main economic sectors; downplay or stay out of companies that are in the broker/media limelight.

Patience plays a crucial role. All too often, investors buy a promising stock just as it enters a period of price stagnation. The idea of prepaid funerals maybe a relatively new idea and may make sense for future investors, but for now it has too many downsides when you could be investing the money more profitably in the stock market.

Do you think it makes sense to pre-pay for your funeral? Please share your thoughts in the comments section below.

This article was originally published in 2010 and is regularly updated.

Comments

  • Another point you forgot, is that one might die in another community, because of circumstances and you would then have to pay to bring the body back to that funeral home, which could prove to be expensive.
    Amar

  • If I don’t die, it would be a waste of money. If I do die I don’t think I will know the difference between a cardboard box or a black mahogany one.
    It remains me of the life insurance salesman who will only sell to you in front of your wife, and he says to you, “when you die do you want her to be left penniless”.

  • It may, but only when the end is in sight – you can prepay a very low-cost and simple passage, and urge your family not to change your plan.

  • My wife and myself have purchased a prepaid plan. We are 83 & 68.We chose the least costly option:creamation with no service.Approx $800 each with $600 placed in a registered trust account earning interest, which will be used for our disposal or can withdrawn at any time at our request.Some funeral homes have a rather aggressive sales approach to grieving relatives. This simplifies our exits. For $200 apeace we and our family have peace of mind.

  • Everyone`s ideas change. One fellow whom I know, an avid hunter, now would prefer his ashes loaded into a bunch of shot shells then blasted by his remaining friends into the woods of a favourite hunting area. Will his ideas change again ? Who knows !!

  • Louise

    Great article Pat!
    Perhaps you ought to suggest to your followers that they “invest” in a membership in a memorial society. Memorial societies are the only consumer operated and driven organizations that keep an eye on the funeral industry as it evolves. The cost of membership is minimal- averaging about $25.00 for a life membership.
    Memorial societies strongly discourage consumers from “prepaying” for funeral services, while they do advocate “pre-arranging” or “pre-planning” to avoid the trappings of the funeral industry.
    To find out more, enter “Memorial Society” into your web browser.
    Consumers and investors really need to become aware of what is going in in this industry. It will blow you away!

  • Paule

    My brother died suddenly at 53 and I was faced with all those painful decisions to make, in addition to mourning him. I want to avoid leaving those decisions to my surviving loved ones; that is why I have purchased a prepaid funeral. But I think that I will check on it; just to be sure everything is as it should be…

  • Why not will your dead body to a medical school for student teaching and or examination? They return the body ashes after creamating when the use of the body is finished. Then your relatives can do with them as they wish. Remember also how spare parts are useful for transplantation.

  • James

    My parents bought two plots in 1953. Then in about 2000 they pre-purchased funeral plans and decided to be cremated instead of buried. Now I have two plots which I can only sell back to the cemetary for $35.00!!
    In addition, my siblings and I decided we wanted to add to each of their funeral plans (using money from the estate, our inheritance). However, it was helpful that they had specified their wishes regarding the service.
    My wife and I plan to leave our bodies to science.

  • Gary F.

    After prearranging and prepaying a traditional funeral over 10 years ago, I thought the initial funds (about $10,000) would always be there. Recently I decided to opt for cremation, and a less elaborate service. I was shocked to find that the ‘cash in’ value of the Plan was only about $7,000–much less than my initial investment, although the current ‘death benefit’ value of the Plan was about $13,500. To me, this is highway robbery. Had I known, I would have put the funds into a TFSA, bearing interest, and I (or my estate), would have the funds available at all times. Live and learn.

  • I bought a funeral plan to make it easier on my survivors in that all arrangements and decisions have been made and the expenses basically have been provided for.

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