Prepaid Funeral Plans Can Be a R.I.P.-Off

EDITOR'S NOTE: This article was originally published inthe September 2011 issue of Kiplinger's Retirement Report.To subscribe, click here.

Tom Waggener remembers how pleased his parents were when they told him 15 years ago that they had prepaid for their own funerals. "It was so satisfying to them" to think that their children were relieved of the burden, says Waggener, 65, a retired state employee who lives near Taylorsville, Miss.

But after Waggener's mother died in 2006, the funeral home gave his family a bill for more than $10,000. It attributed the extra cost to a special order for the casket she had chosen, which was no longer in stock. "It was an unpleasant business," Waggener says. "I really don't think prepaid funerals are a good idea."

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Paying for your own funeral in advance sounds like an ideal way to spare your survivors some stress and expense. But a growing number of consumers are finding that these "pre-need" funeral arrangements can come with unexpected costs and, all too often, outright fraud. A slew of recent state and federal investigations have uncovered everything from excessive fees levied on prepaid funds to misappropriation of the money.

Though statistics on the industry's size are hard to come by, the alleged losses in some of these cases suggest that prepaid funerals are very big business. In indictments late last year, the U.S. Attorney's Office in the Eastern District of Missouri claimed that mismanagement of prepaid contracts sold by National Prearranged Services had cost contract purchasers, funeral homes and state insurance guarantee associations $450 million to $600 million. Burton Shostak, a St. Louis lawyer representing Randall Sutton, the indicted former president of National Prearranged Services, declined to comment, since the matter is ongoing. (The company, based in Clayton, Mo., collapsed in 2008.)

Many people who prepay for their funerals believe "that they've magically waved away any potential problems for their survivors, when in fact usually the opposite is true," says Joshua Slocum, executive director of Funeral Consumers Alliance, a consumer advocacy group. About one-third of the complaints the group receives involve prepaid funerals, Slocum says.

Yet some funeral directors say that consumers' interest in prepaying for funerals is only growing stronger. One factor: rising funeral costs. The average adult funeral cost $6,560 in 2009, the most recent data available, up from $5,180 in 2000, according to the National Funeral Directors Association. And those figures don't include cemetery and monument costs. Many funerals cost well over $10,000.

Prepaid funeral contracts come in several flavors. Buyers can make these arrangements directly with a funeral home, as Waggener’s parents did, or with a prepaid contract provider that works with a number of funeral homes. Depending on the contract, you pay in a single lump sum or in periodic installments.

A "guaranteed" plan promises to provide the goods and services selected, no matter how much prices rise, while nonguaranteed plans don't offer this protection -- meaning your survivors may need to pay more when the services are provided. The funeral home may deposit prepaid money in a trust or send it to an insurance company, and the money is released to the funeral provider upon the beneficiary's death.

The funeral industry says the contracts are a good value because they provide peace of mind and allow consumers to lock in the price of a funeral years in advance. "Prepaying a funeral is the best deal going for the consumer," says Bob Arrington, a funeral director in Jackson, Tenn., and spokesman for the National Funeral Directors Association. As for the recent investigations into mismanagement of prepaid funds, he says, "every industry has got some black eyes."

The Consequences Can Be Grave

Yet even when prepaid contracts stay within the letter of the law, they can hold nasty surprises, consumer advocates say. One reason: There's a hodgepodge of state laws offering varying levels of consumer protection.

Florida law requires as little as 70% of money prepaid for services and 30% of the retail cost of caskets and other merchandise be put in a trust. The funeral home can take charge of the remaining funds. If you move or simply change your mind and cancel the contract after the first 30 days, the funeral provider doesn't have to provide a refund for the merchandise cost. In West Virginia, the contract seller can pocket 10% of the prepaid money if the consumer backs out.

People who feel they need a prepaid contract -- if only for peace of mind -- should ask a lot of questions first. Find out if your money is going to a bank or insurance company, and ask for regular statements from the financial institution holding the funds. Ask what penalties you may pay for canceling the contract.

You do have options that may be simpler and safer than a prepaid contract. You can plan your funeral without plunking down a dime. Under Federal Trade Commission rules, funeral directors must give you itemized prices for goods and services. Though many funeral homes offer packages, you have the right to purchase items a la carte. Make a list of your preferences, and give a copy to loved ones or a lawyer.

And if you want to set aside money for your funeral, you don't need to relinquish control of the assets. You can set up a payable-on-death account with your bank, naming one or more of your survivors as beneficiaries.

That's what Irene Hicks wishes she had done 15 years ago. Hicks and her husband, Thomas, purchased prepaid funeral contracts for themselves in 1996 from F.E. Runner Funeral Home in Elkins, W.Va. About ten years later, they also bought a prepaid contract for their disabled son. In late 2006, Hicks called the bank that was supposed to be holding the prepaid money and learned that the funds for her husband's contract had been withdrawn a couple of years earlier. Yet her husband was -- and remains -- very much alive and well. "He's 77 and still riding a motorcycle," says Hicks, who now lives in Crystal River, Fla.

In a complaint filed against the funeral home and its owner, Cheryl Runner, in 2007, the West Virginia attorney general charged that Runner had forged Thomas Hicks's death certificate and took his funeral money. What's more, Runner had never deposited prepaid funds for the Hickses' son in the bank but instead cashed the check, the attorney general said. The court found in favor of the attorney general and ordered all open prepaid funeral contracts with F.E. Runner relinquished to the state. Runner did not respond to requests for comment. The Hickses ultimately recovered the prepaid funds.