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. As we head into 2020, we continue to witness the biggest transfer of wealth from one generation to another, and it’s information we all need.
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 pre-selected funeral services) at an indeterminate point in the future—a 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 You may also be stuck with your initial funeral plan, even if it’s hopelessly out of date in relation to community standards or the personal circumstances of you or your survivors.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.
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