Top 5 Reasons Not to Get a Pre-need Death Insurance Policy

By M. Kotch

We buy insurance policies for so many things in our daily lives. From health to car to travel, it seems like everything has to be covered. Life insurance is something we all think about at some point or other. After all, don’t we want our loved ones taken care of? In that same vein, wouldn’t a pre-need death insurance policy be a prudent purchase to protect our loved ones? It may not.

Such policies are purchased from a particular funeral home and allow you to choose specific goods and services for your funeral; these choices are not subject to change.
This may or not work for your situation. To help you make an informed decision, here are some of the reasons not to get a pre-need death insurance policy.

1. Don’t lock your money away for someone else’s benefit. When you purchase a pre-need death insurance policy, you are not buying a policy from an insurance company. The funeral director is in fact a licensed agent that is selling you the policy, and as the beneficiary of the pre-need insurance policy, the funeral home will receive a bonus from your purchase. The real question is, why give someone thousands of dollars (and accumulating interest) to cover your future funeral expenses when you could be saving the same amount of money and accrue the interest yourself? Thanks to medical advancements, we’re living longer than ever. Five, ten or more years of interest could add up to a lot money that would only end up in someone else’s pocket.

2. If your circumstances change, the policy won’t. A pre-need death insurance policy can be very limiting in that it does not allow you to cancel, change any details or transfer benefits to another funeral home. If you and your entire family live in one place and always have that may sound like a great idea. But for a majority of Americans, a new job, medical concerns, and different marital status can mean moving to another town or state. Pre-need death insurance policies are non-transferable, so if you change locations, you’re out of luck. Even if you are retired and settled, circumstances can change if you move in with other family member who may in turn need to move.

3. The fine print. This kind of policy sounds all-inclusive and covers every single detail, right? Wrong. For example, while you may have already purchased a plot of land through the policy, that may not cover the fee of digging and covering the grave during the burial. Other variables that are hard to predict include the cemetery you’ve chosen running out of space, the funeral home closing/changing owners and particular services you’ve requested—and paid for—no longer being available. Remember, your family will be stuck with any extra fees and decisions to make.

4. In case of emergency—there’s nothing you can do. Setting up a trust or savings account with a certain amount of money to cover funeral expenses is a smart move for you and your loved ones. What isn’t smart is locking away a large sum of money that cannot be accessed in case of a family emergency or financial crisis. The current economy has illustrated the fact that setting money aside (that cannot be accessed quickly) and assuming that it will only grow and work for you may not be the foregone conclusion it once was. Let’s say you’ve purchased a pre-need death insurance police for $14,000; a few years have passed and you would now rather have a simpler funeral in exchange for financially supporting yourself or a loved one in financial need, but can you? With this kind of policy, unfortunately you cannot.

5. Smart and flexible alternatives are available. Skip the agents, bypass the lawyers and forget the fees by setting up a POD or pay upon death bank account (POD accounts are essentially trusts that you create without the need for an attorney to draw them up). This will enable you to leave a certain amount of money that will be collected by the beneficiary of your choice (including a funeral home) after your passing. A POD account can be set up at almost any bank.

Note: you can create multiple POD accounts for multiple recipients; just know that each POD account can only have one beneficiary.

4 Responses to “Top 5 Reasons Not to Get a Pre-need Death Insurance Policy”

  1. Bryan says:

    Several points in this article are very inaccurate and do a disservice to your readers!

  2. Bryan says:

    Oh where to begin with my corrections :)

    1) So I am supposing when you buy insurance from other life insurance agents they receive no commission either they are doing Volunteer work, come on :) I think you are forgetting if you pay a funeral home $6,000 today that is all the funeral will ever cost you, when you buy a life insurance policy that same funeral will cost you probably double in 20 years down the road if you use your own insurance policy, when you pass. Seems like a money savings to me. Lets not forget the reason that 90% of people pre-arrange in the first place and that is to qualify for medicaid! Funeral pre-planning is protected under the liquidation rules of medicaid regular life insurance, CD’s and Payable on Death Accounts are not and will be shortly devoured by nursing home costs, then nothing is left for burial expenses.

    2) Evidently someone did almost no homework on this one, 99.9% of pre-arrangements are transferable to anywhere in the U.S. just contact the new funeral home and they will be happy to do the paperwork for you…. In regards to getting your money back every pre-arrangement contract has an option to make it revocable or irrevocable, the reason the latter is mostly chosen by the FAMILY is to protect the money under Federal Medicaid Laws…

    3) Ok this ones seems a little silly, try going into your local chevy dealership and asking them to throw all the fuel you will ever need into the price of the car and see what they say…. Cemetery costs are not a Funeral Homes expense so how can we predict or guarantee what they are going to be in 20 years. All we can control are our costs not everyone else’s. On a side not many cemeteries allow you to pre-pay their charges as well now…

    4) See answers to 2) & 3)

    5) POD accounts are no longer acceptable to many funeral homes due to state trusting laws and again this is a good idea until mom has to go into the nursing home an qualify for medicaid and Job & Family forces you to cash these in and spend the money on nursing home care. Anything that is an asset falls under the medicaid laws except funeral pre-arrangements!!!!!!!!

    Sorry I just couldn’t let this much misinformation go without correction……

  3. Maybe you should also publish an article titled “Top 5 Reasons to Buy a Pre-Need Funeral Plan”?
    There are some simple reasons to do so, and they are all reasons that, in my previous life as a funeral home manager and licensed insurance agent, I sold good policies to people who needed them.
    Yes, there are exceptions to the rule, but aren’t there with everything? Don’t most things that are good for people also have negative side effects?
    Truth is, much of your article is inflammatory and plain wrong. Bryan has done a decent job of giving you the main reasons, but here are a few more.
    1. Locking your money into a pre-arranged funeral doesn’t mean the funeral director will get more money at the time of your death. Many states, including Florida, require the funeral home to provide the promised services for whatever amount is in the policy UNLESS the current price of the funeral is LESS than the amount in the policy. Then, the funeral home is required to refund the balance to the beneficiary. That means the funeral home will never get more than their regular prices at the time of death. Sounds like a benefit to the person making the arrangement, doesn’t it?
    2. Don’t buy a policy that isn’t transferable. If you buy an insurance policy and don’t irrevocably assign it, that money still belongs to you. You can borrow against it, cash it out, change the funeral home designated. The only thing that won’t transfer with the policy is the funeral home’s price guarantee. That makes sense, because you’d be changing your services to a new funeral home that can’t be held responsible for the promises made by another business. Still, you keep all the value of the policy.
    3. Always read the fine print. Never assume that the salesperson has told you everything that is excluded. But that’s good advice for any contract, isn’t it? And Bryan’s right; no funeral home is going to guarantee that a separate cemetery will never raise their prices. In fact, until a few years ago, funeral homes in Florida couldn’t sell the “opening and closing” service ahead of time, even if a family wanted to pay for it.
    4. In case of emergency, thank God you pre-paid. How many times are families blindsided by the cost of a death? How often do families regret not having planned better? Do you know how long it takes for a traditional insurance policy to pay out a benefit to your family? But heck, if you buy your own policy, maybe the funeral home will wait 4 to 6 weeks for you to get an insurance payment to hold the funeral.
    5. Research ALL the options and then pick the best one for your situation. POD might be good, but maybe you’re trying to qualify mom for Medicaid. That requires irrevocable assignment to a funeral home. Maybe stuffing that cash under the mattress is a better option for you. Won’t protect against prices going up, but you won’t lose it all in the stock market either. Study, research, ask questions. And don’t rely on “top ten” or “top five” lists for anything more than the beginning of your education.
    All in all, you’ve written an interesting article that just happens to be completely one-sided and, in many respects, wrong. I’m assuming you’ve never sold funeral pre-arrangements or sat in on a few arrangement conferences. At least, that’s how the article reads.
    Hope you do a bit more research and get the story right next time.

  4. Patrick says:

    I am so glad Brian and Tim answered. I am about to begin my career in Pre Need and half way thru the second paragraph I started to change my mind. Thanks guys!

Leave a Reply