What Are Pre-Need Plans and What Should Consumers Know About Them?

Ruth Bennett, Executive Director of the Funeral Consumers Alliance of Arizona

Today SevenPonds speaks with Ruth Bennett, the Executive Director of the Funeral Consumers Alliance (FCA) of Arizona. A nationwide organization, the FCA is a nonprofit that works to protect the rights of consumers to choose a “meaningful, dignified, affordable funeral.” Ruth has been with the FCA since 2010. She has agreed to speak with us today to discuss “pre-need” plans and the various ways in which consumers can preplan for their own funerals or those of their loved ones.

Editor’s Note: This interview has been edited for length and readability.

Kathleen Clohessy: Hi Ruth! Thanks for speaking with me today. Can we start out by talking a little bit about what the Funeral Consumers Alliance of Arizona and your role there?

Ruth Bennett: Sure. The Funeral Consumers Alliance is a nationwide, nonprofit information and advocacy organization. Here in Arizona and in some other locations, we are membership based. That is, we charge a very reasonable yearly fee in exchange for assisting our members in finding ethical funeral homes who can assist them in planning an affordable cremation or burial. In addition to that, we provide consumers with information about their legal rights and monitor the actions of the local funeral board.

Kathleen: How did you become involved with the FCA?

Ruth: That’s a long story! My wife was a hospice R.N. in Washington State for many years, and through her I became involved with the People’s Memorial Association (the Washington branch of the FCA). At the time, the funeral industry in the state was lobbying to prevent people from having home funerals, and we were working to stop that. I also worked in the travel industry for about 20 years and served on the national FCA Board of Trustees before moving to Arizona and taking over as the Executive Director here.

Kathleen: You obviously know your way around the funeral industry! So what can you tell me about pre-need plans? For instance, what are they and why would a consumer want to enter into one?

Ruth: In a nutshell, “pre-need plan” is a term that the funeral industry has come up with to try to sell people on the idea of pre-paying for their end of life expenses — burial, cremation and all the rest.

There are three basic ways to pre-pay. The first is called a funeral director’s trust, in which the person purchasing the plan pays the entire amount to a funeral home up front or sometimes over a period of time. The money is supposed to be kept in trust and be available to pay final expenses when the person dies. These trusts are state-regulated, so the rules around how the funds are protected depend on where the person lives.

In some states, the trust is fully vested immediately, which means the funeral home has no access to it, and the financial institution has to provide periodic reports — the whole process is very consumer friendly. But in many states, Arizona being one of them, that is not the case. In those states, the funds are not well protected and they are typically not transferrable and not refundable. So if you pay your money to a funeral home in Tuscon and you die visiting the grandkids in Wisconsin, that’s just too bad! For that and several other reasons, we generally strongly recommend against a funeral director’s trust.

An elderly couple talks with a funeral director about a pre-need plan

One example of the type of thing that can happen: A woman called me to tell me that her mother died after establishing a funeral directors trust. She had prepurchased a number of items, including her coffin. (Let’s call it the ABC coffin.) But when the woman died, the funeral director told her daughter that the ABC coffin was no longer available. However, an almost identical model was, and it was “only” $1,000 more.

I also heard another story years ago in which a number of “investors” bought up a bunch of funeral homes in the Midwest. They subsequently stripped the funeral homes of all their money, then closed up shop and took off, leaving the rural farmers who had purchased pre-need plans from those funeral homes with nothing to show for the money they had paid.

That kind of things happens all the time, and there are lots and lots of stories out there about people losing money in trusts.

Kathleen: Are all trusts so unethical? Are there any that you would recommend?

Ruth: Well, they’re not perfect, but Service Corporation International is pretty solid. Their pre-need plans are nonrefundable, but they have so many branches across the country that transferability is not a problem. If you sign up with an SCI facility in Yuma and die in Minneapolis, there will be an SCI facility there to take care of you. The downside is that SCI facilities tend to be very expensive.  

Kathleen: OK. So let’s scratch funeral directors trust off our list of pre-need plans you might recommend. What’s the second way to pre-pay?

Ruth: Another way to prepay for funeral expenses is through an insurance policy … basically, a life insurance policy that is intended to pay your final expenses when you die. They are usually purchased through a funeral home, but the actual policy is issued by an insurer. Colonial Penn is one example; Met Life has started to write some of these kinds of policies too. Very often these policies come about when one of the partners in a couple dies, and the funeral director uses the opportunity to sell an insurance policy to the surviving spouse.

Ruth Bennett gives a speech at the Funeral Consumer Alliance

I used to think that insurance policies were “not too bad.” You typically pay for them up front, but they are transferable, depending on how you leave the beneficiary. They are not refundable, so you want to make sure that you are buying from an insurance company that’s well known and has a good reputation.

But there are some downsides to insurance policies too. I know of two instances where a couple paid a substantial amount upfront — about $4,000 each — for an insurance policy to cover their funerals and burials. Many years later, they needed cash out of the policy and wanted to use the money to pay for a less expensive cremation instead. In both cases, the cash value of the policies had actually decreased over time, so that the amount available for them to take out of the policy was only a fraction of the amount they had paid up front.

Kathleen: What? How can that happen?

Ruth: I know, it sounds crazy, but it does. And that right there convinced me that buying an insurance policy is a bad idea.

Kathleen: Wow. What are the other downsides?

Ruth: Well, I’m not saying it happens all the time, but very often funeral directors will sit down with a client and discuss how much insurance the client can afford. Then, “Voila!” the cost of the services the client wants is magically just a tiny bit more than the amount of insurance the person can afford to buy. Or after the person dies, the cost of the services they chose is suddenly just over the amount of insurance they had. 

It’s also really important if you do buy an insurance policy that you know who the beneficiary is. Funeral homes will often make themselves the beneficiary, which can cause all kinds of problems down the road. I heard one story in which a man bought about $5,000 in insurance for a traditional burial, and later decided with his family that he wanted a simple cremation, which costs thousands less. He died shortly after that and was cremated, and the family asked the funeral director for the balance of the money from the policy. That’s when they learned that the beneficiary was the funeral home. So the money that their father had paid went to it rather than to his heirs.

Kathleen: So the funeral director pockets the money? Again, wow!

Ruth: Well, it doesn’t happen all the time. But I’ve heard enough of these kinds of stories through the years that I do not recommend that people buy insurance policies to pay their final expenses. It’s just not a good idea.

That said, there is one benefit to buying an insurance policy, and that’s when a person needs to enter a long-term care facility. That’s because the cost of a nursing home or assisted living facility is usually picked up by Medicaid, and in most states, Medicaid eligibility rules require that a person has essentially no assets to qualify. But insurance policies are what’s called a “protected asset.” So a person can buy an insurance policy for say $10,000 and still get Medicaid to pay for their care. And then the money in the policy is available to their heirs when they die.

It’s a little sneaky and unethical, but it’s perfectly legal.  

This concludes part one of our interview with Ruth Bennett of the Funeral Consumers Alliance of Arizona. Please come back next week when we talk about other ways to pay for your final expenses and get some advice from Ruth about the safest approach.