Planning for a funeral in advance of death is called a preplanned or prearranged funeral. Preplanned funerals may or may not be prefunded. Prearranged funerals offer a permissible vehicle to divest assets for those seeking public medical assistance due to long term care needs. Preplanning offers some other advantages:
- There are no time constraints.
- You will have the opportunity to evaluate your needs, desires and financial capabilities more carefully.
- You can leisurely contact area funeral homes.
Michigan law does not guarantee that your preplanned choices will be carried out. The next-of-kin is empowered to alter your choices after death. The next-of-kin may not cancel a prefunded contract outright after death, however.
ESCROW-FUNDED FUNERAL PLANS...
Guaranteed Price Contract
This option allows you to plan a funeral at today's prices. You pay for the funeral in advance and your funds are placed in an escrow account.
This type of plan uses the interest collected in the escrow account to offset increase in costs because of inflation. You or your survivors will never be required to pay any additional money for the merchandise and services contained in the contract. Nor is the funeral director required to give you a refund if the funds in the account are more than is necessary to carry out your wishes. When this type of plan is chosen, the interest stays with the escrow fund and you do not collect it. You are responsible for income taxes on the interest or capital gains. If this is a concern, ask your funeral director about several funds available where the escrow plan bears the tax responsibility. The funeral home may not touch these funds without proving the contract has been fulfilled. You may also cancel the contract at any time for any reason, unless it has been certified irrevocable by the Department of Human Services. However, if you do, the funeral director may retain up to 10% of the principal and interest as a cancellation fee.
Non-Guaranteed Price Contract
This is similar to the above plan except that the prices contained in the contract are not guaranteed. Preplanning still occurs and the funds are placed in trust, but the services and merchandise selected are charged at the prices in effect at the time of death. If there is not enough in the escrow account to cover the choices, the survivors would have to supplement the account or make different choices to accommodate the funds available. If there is an excess of funds in the account, the estate of the deceased receives a refund from the funeral home.
The cancellation provisions for this plan are the same as for the previous plan, as is the responsibility for the taxes.
INSURANCE FUNDED FUNERAL PLANS...
With this option, you select funeral services in advance of death and purchase a life insurance policy (sometimes called “funeral insurance”) sufficient to cover the anticipated cost of the funeral. The funeral director accepts the risk that the funds may not be sufficient to cover the costs when the death occurs.
You should clearly understand that you are purchasing an insurance plan and not an escrow plan. The major difference is that, under an escrow plan, if you cancel the plan, the funeral home may keep no more than ten percent of the trust account. You receive everything else you have contributed, plus interest. If you cancel an insurance policy, you receive back only the “cash value.”
Insurance funded prearrangements may only be sold by persons who are licensed by the State Office of Financial & Insurance Regulation. If there are any questions about your contract for this type of plan you should call that agency for information.