Preneed funeral contracts vs final expense policies

I am often asked which is better. I think that is the wrong question. A preneed funeral contract and a final expense policy solve different problems. Pick the one that matches the problem you have, or, sometimes, use a little of each.

The two in one sentence each

• A preneed contract is an agreement with a specific funeral home to provide specific goods and services when you die, paid for now or in installments.
• A final expense policy is a small whole life insurance policy that pays a cash benefit to a person you name, who then pays the bills.

Side by side

Question	Preneed funeral contract	Final expense policy
Who receives the money?	The funeral home (often through a trust or an insurance policy that names it)	Your beneficiary
Does it fix the price?	Often yes, for the goods and services listed, if it is a "guaranteed" contract	No. It pays a fixed dollar amount
Can the money be used for other bills?	Generally no	Yes
If you move far away?	Depends on the contract and state law; may not transfer cleanly	Follows your family anywhere
Health questions?	Usually none	Simplified issue has some; guaranteed issue has none
Who regulates it?	State law, plus the FTC Funeral Rule on pricing disclosures	State insurance departments

When a preneed contract fits

A preneed contract suits people who know exactly what they want, intend to stay in the same area, and want to stop worrying about funeral price increases. Good reasons include:

• You have already chosen the funeral home, the service and the merchandise.
• You want to spare your children the decisions in a hard week.
• You are planning for Medicaid. Many states allow an irrevocable funeral contract or trust to be set aside without counting against Medicaid eligibility, within limits the state sets. Ask your state Medicaid office or an elder law attorney how your state treats it before you sign.

Read these lines before you sign

Preneed contracts vary more than people expect. Ask for each answer in writing.

1. Is the price guaranteed? A guaranteed contract locks the price of the listed items. A non-guaranteed contract applies your money to whatever the prices are at the time of death, and your family may owe the difference.
2. What exactly is included? Get the itemized list. Items outside the funeral home's control, like cemetery charges and death certificate fees, are often excluded.
3. How is it funded? Usually through a trust or an insurance policy. Your state sets rules for how much must go into trust and who holds it.
4. Is it revocable? Can you cancel, and what refund would you receive?
5. What if the funeral home closes or is sold? Ask who honors the contract.
6. What if you move or die away from home? Ask about transfer and what is refunded if another funeral home is used.

Your state's attorney general, insurance department or funeral board can tell you which agency regulates preneed sales where you live.

When a final expense policy fits

A final expense policy suits people who want flexibility. Choose it if:

• You are not sure where you will live, or where you will be buried.
• You want the money to cover more than the funeral: a last month of bills, travel for family, a headstone ordered later.
• You want to leave the decisions to your family and simply make sure the money is there.

The trade-off is that a policy pays a fixed amount and does not lock in prices. If funeral costs rise faster than you planned, your family covers the gap. Some people buy a little more coverage than today's price for that reason. I covered the details in Final expense insurance: what it covers and what it doesn't.

Using both

Some families do this: a preneed contract for the funeral itself, and a small policy or a payable-on-death savings account for everything around it. That can work well. The danger is the opposite situation: a family that does not know about the preneed contract, walks into a different funeral home in a hurry, and pays for a second funeral. It happens.

The one rule for either choice

Write it down and tell someone. Put the contract or policy, the company's phone number and the name of the person you spoke with in the same folder as your letter of instruction. Then tell your executor and at least one child where that folder is. A plan that is hidden protects nobody.