Prepaid funeral plans popular, but interest-earning trust may be better

By Andrew Gomes
Advertiser Staff Writer

Prepaid funeral plans are increasingly sought out by seniors wanting to lessen the burden on their family and friends at the time of death. But whether it is the best option for you, depends on several considerations.

According to AARP, U.S. consumer spending on prepaid funeral plans jumped from $18 billion in 1995 to more than $25 billion by 1999.

A 1998 AARP survey also reported that two in five people age 50 or older had been contacted about the advance purchase of funeral-related goods and services.

Funeral operators say prepaid plans are a smart tool that provide peace of mind.

They argue that prepaid plans can relieve family members from making important, and often expensive, decisions during a time of grief, when emotions can lead to overspending. Prepaying also helps ensure the expense will be covered.

"A lot of times siblings fight over who's going to pay, and over what mom or dad wanted," said Scott Sells, operations director at Borthwick Mortuary. "It's not just a financial thing. You are able to go through a healthier grief cycle. That is a big intangible."

Generally, prepaid plans discount merchandise and services by 10 percent or 15 percent, and offer potential further savings if prices are higher at the time of need. Often purchasers pay for such plans with no-interest monthly installments over several years.

Prepaid plans also can be useful if buyers need to reduce their assets to qualify for Medicaid.

But consumer groups — including AARP, Consumers Union and Funeral Consumers Alliance — say people often are better off avoiding prepaid plans.

In Hawai'i, state law allows funeral companies to keep the first 30 percent that a consumer pays toward the plan's total if the consumer cancels for any reason. The funeral company also can cancel the plan and keep all the money paid into it if the customer fails to make two monthly payments. Default and cancellation policies differ depending on the company.

Consumer groups argue that a better alternative is to put money for preselected funeral services and merchandise into an interest-earning "payable-on-death" bank account, such as a Totten trust. Money in a Totten trust is controlled by the person who set it up until he or she dies, when it becomes the property of a selected beneficiary.

For those who opt for a prepaid plan, industry advocates and critics agree that buyers should always clearly understand default and cancellation policies, among other contract terms.

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.