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Be Cautious If You Plan Your Own Funeral

Generally we don’t like to think about our mortality, but many people do just that when they include a prepaid funeral in their estate plan to take the burden off their loved ones.

A Years-Long Scam

The Federal Bureau of Investigation (FBI) cautions consumers about a scam involving prepaid funerals.

In one case, six individuals were sentenced to federal prison for their role in a Ponzi-like prepaid funeral scheme. The complex case was investigated by three federal agencies, a number of state regulatory agencies, and the Department of Justice. It began in 2008 when the FBI received information from several state agencies about the shady practices of National Prearranged Services Inc. (NPS) and one of its affiliated life insurance companies.

Ultimately, the co-conspirators were sentenced on more than 40 counts of fraud, money laundering, and related crimes.

At sentencing, U.S. District Judge Jean C. Hamilton noted that the defendants had defrauded more than 97,000 customers in more than 16 states, hundreds of funeral homes, and multiple financial institutions, causing more than $450 million in losses.

In the fraud, which ran from as early as 1992 until 2008, Missouri-based NPS would discuss with customers what they wanted, agree on a price and take payment. The company would make arrangements with the customer-designated funeral home and, in accordance with state law, the money would be placed with a third party.

Depending on the state, that third party would be a financial institution that would put the funds into a trust that could be only used for safe investments or a life insurance company that would put the funds into a life insurance policy in the name of the customer.

What NPS didn’t tell its customers was that it didn’t put all of their funds into trusts or life insurance policies. Instead, it altered application documents to change deposit amounts, name itself as beneficiary, converting whole life insurance policies to term life, and using the money for such unauthorized purposes as risky investments, payments for existing funeral claims, and personal enrichment.

In some instances, defendants even removed money previously placed in trusts and life insurance policies. NPS routinely lied to state regulators about its practices.

According to the FBI, the company also purchased large blocks of prearranged funeral contracts from funeral homes that had previously entered into their own prearranged funeral contracts with customers, falsely telling these funeral homes that the contracts would be rolled over into life insurance policies.

Prepaid funerals are a growth industry. While the number of people actually paying funeral costs as part of estate planning is still quite small, many more people are considering arranging their funerals, which can often lock in the price.

According to one survey by the National Funeral Directors Association (NFDA), fewer than 22% of respondents said they had arranged their funerals. However, of those who had not, nearly 50% said they were very likely or somewhat likely to do so within the next five years. Of those who had made arrangements, 20% had already paid and 80% had not.

If you plan to make arrangements for your funeral, the NFDA suggests four steps:

1. Tell your family the details of your plan and that it is what you want.

2. Comparison shop for the best deal.

3. Check to see if your life or auto insurance or pension pays for funeral expenses.

4. Find a plan where you can make monthly payments rather than pay for it all at once.

The national median cost of a funeral is $7,360  according to the latest figures available from the NFDA. That price does not include a cement lining for the grave, nor the costs of flowers, a reception, a grave stone or limousines. Those extras can easily boost the price to well over $10,000. A cremation runs about $2,000 but there are generally extra costs associated with it, too. With a funeral and viewing, the extra costs could add several thousands of dollars.

The Federal Trade Commission regulates the funeral industry, requiring funeral directors to give you itemized prices so you can choose what you want. If you or your family wants to shop for a cheaper coffin, the funeral home is required to use it even if it was purchased elsewhere and not charge you a fee for handling it.

Make sure your contract includes a clause for cancellation or refund. That could happen if you or your family decides to bury you elsewhere or if you found a better deal.

If you plan to take this step there are certain precautions you should take:

  • Research the funeral home, including getting references from people who have used the service.
  • Read the fine print. If you die at a location outside the service area, there may be charges to bring the coffin home, pick it up at an airport and fulfill the contract. Your family should plan on spending more for the transfer.
  • Keep in mind that some prepaid expenses don’t count when it comes to the Medicaid “look back” rules.
  • Laws vary in individual states so be aware of what’s required where you live. The Funeral Consumers Alliance (FCA), a consumer watchdog group, says state protections vary widely and the laws can provide windows of opportunity for unscrupulous operators. (See right-hand box for an example of one fraud case.)

As well, you should ask the following questions:

  • What are you paying for? Are you buying only merchandise, like a casket and vault, or are you purchasing funeral services as well?
  • What happens to the money you’ve prepaid? States have different requirements for handling funds paid for prearranged funeral services.
  • What happens to the interest income on money that is prepaid and put into a trust account?
  • Are you protected if the firm you dealt with goes out of business?
  • Can you cancel a contract and get a full refund if you change your mind?
  • What happens if you move to a different area or die while away from home (some prepaid funeral plans can be transferred, but often at an added cost)?
  • Be sure to tell your family about the plans you’ve made and where your documents are located.

The FCA advises against prepaying for funerals because it’s very easy to be misled and wind up paying extra charges. Instead, the group recommends setting up a separate bank account to save for your funeral.

It may be enticing to act before prices go up, but making and paying for the arrangements ahead of time can be a costly mistake, the FCA says. It advises that you think long and hard before buying a cemetery plot ahead of time.

The FCA notes that it can be difficult to predict with certainty that you’ll still be living in a cemetery’s area many years down the road and that transporting a casket a long distance can be extremely costly for your survivors. As well, it can be difficult to sell a grave you no longer need, particularly as the rate of cremations continues to rise.