“Pre-Need” is short for a “pre-need funeral contract,” a contract originating at a funeral home or cemetery with prepayment for selected goods and services.
Pre-need is a particular type of funeral pre-planning where an individual works directly with a specific funeral home or cemetery to price out and pre-purchase funeral services and products from them.
At a funeral home, this will likely include outlining funeral preferences such as burial vs cremation, services options including a viewing, funeral ceremony, graveside ceremony, a memorial service or celebration of life, and selecting a casket or urn that they resell.
At a cemetery, a pre-need contract would be for the pre-purchase of a cemetery plot or niche, opening & closing fees, a monument, plaque or headstone, and/or grave-liner.
You can pay for pre-need contracts upfront or if you want to pay for them over time, many providers will use a pre-need insurance policy or a funeral trust which you can make monthly installments until paid in full. Whether it’s an insurance policy or a trust is dictated by state laws.
No matter if you pay in-full upfront or pay over time, ask how these funds are handled. Many states have laws protecting consumers from fraud that ensure all or a certain percentage of the funds is put into a funeral trust or insurance policy with the funeral home or cemetery listed as the beneficiary. Only when the individual dies can the funeral home or cemetery access those funds to pay for the services or products.
How Pre-Need Differs from Life Insurance
Unlike life insurance or final expense burial insurance that you purchase from an insurance agent, the funds set aside in a pre-need contract get transferred to the funeral home or cemetery as the beneficiary and there is not much flexibility in moving or using the funds at a different funeral home or cemetery.
This lack of flexibility could create more frustration and hassle than the planner intended if the original funeral home or cemetery no longer exists, is under new ownership, or if the deceased moved and those locations are no longer convenient or preferred.
However, one upside to a pre-need contract is that the funeral home or cemetery guarantees that their prices for the services, products, or cemetery space that you chose will not increase in price (“locking in the price”).
Keep in mind though, that unless you bring home a specific casket or urn you’ve chosen at the time of pre-planning, that exact product likely won’t be available at the time of your passing. In this case, the funeral home will offer a “similar” product to your family.
Is a Pre-Need Contract Right for you?
One misconception with pre-need contracts is that “everything is taken care of.” But typically, 3rd party charges (aka “pass-through charges”) are not pre-paid or guaranteed and your family will still need to pay for those at the time of service. These charges can include an honorarium for clergy or an officiant, death certificates, professional hair-styling, flowers, 3rd party crematory fees, and grave-site opening and closing fees.
Though we generally discourage the use of pre-need contracts in funeral pre-planning (opt for a Payable on Death bank account or life insurance product instead), there is an instance when they are worth considering - spending down for Medicaid. Funds in a pre-need contract are protected and exempt assets that can ensure funeral expenses are covered if the individual then needs medical or long-term care paid for by Medicaid.
If this is the case for you, keep in mind that funeral pre-need plans are purchased directly through funeral homes, covering specific costs that are particular to that funeral home. Since costs can vary greatly from funeral home to funeral home, be sure to compare the General Price List (GPL) of several funeral homes before deciding who to purchase the plan from.
The Federal Trade Commission (FTC) advises you to ask the following when considering prepaying for funeral services through a pre-need contract:
What exactly is included in the cost?
Does the cost cover only merchandise, like a casket or urn, or does it include other funeral services?
What happens to the money you have paid? State requirements differ in how the funds must be handled.
What happens to any interest income?
Are you protected if the funeral home goes out of business?
Can you cancel the contract and get a full refund?
What happens if you move or die while away from home?
Can the money from the contract be transferred to another funeral home?
What happens if the services and items I chose are not available at the time of my death?
What happens if the casket I choose is unavailable at the time of my death?
Assets held in Irrevocable Trusts are also exempt from Medicaid limits and are a good option to consider if this is your goal in pre-planning a funeral.
In summary, a pre-need contract is a specific pre-paid funeral plan created at a funeral home or cemetery. Pre-need contracts can be paid in full from the start or paid for over time. Though they seem like a good idea on the surface, they do lack flexibility in where to spend the money and if preferences change, it makes it complicated to use a different provider and/or recuperate unspent funds.
Payable On Death bank accounts and life insurance, including final expense or burial insurance, are good alternatives for pre-paying estimated funeral expenses that are more flexible and portable, allowing your family more freedom on where to spend it in the future.