Funding  a Pre-Need Contract

            by Charlie Taggart, FD

            In another article, I discussed the benefits of pre-planning a funeral.. I would now like to offer my recommendation that the readers also pre-pay for those arrangements with an Irrevocable Burial Reserve Trust Agreement.

            There are a number of good reasons for prepaying a funeral. It brings the client overall peace of mind and relieves his or her loved ones of the burden of making the payment at a time already riddled with grief and uncertainty. The monies used to fund a properly prepared and funded burial reserve agreement will be protected from Medicaid, SSI and other governmental claims and liens; the monies will not be taken into consideration when the government determines eligibility for benefits.

There are several ways to fund a burial contract. I will explain them, also offering comments and recommendations.

1.) Pass Book Savings Accounts simply are NOT GOOD VEHICLES for funding final expenses. Such accounts generally generate a low rate of interest return and subject the depositor to yearly income taxation.

2.) Certificates of Deposit and Money Market Accounts are acceptable vehicles for funding; however, the interest rates vary greatly and are locked in for varying lengths of time (1, 3 or 5 years, e.g.). This generates renewal and rate selection concerns and errors, contradicting the peace of mind that pre-planning is meant to relieve. Moreover, the interest is taxable each year. At times the rates are too low to be attractive. There are better and more productive investment alternatives.

3.) Single Pay Premium Life Insurance Policies are the most solid and affordable means for funding final expenses and offer the greatest return on the funding of a burial trust.

In the first place, the client can acquire the appropriate amount of insurance for a price that is often far less than 60% of that which would be required to fund the funeral through a cash investment into a CD or other bank account. For instance, a 65 year old female can purchase a $15,000.00 policy for only $7,405, while a man of the same age can do so for only $8,350.

Second, the benefits from the life insurance policy are paid tax free – the family will never pay any income or inheritance taxes on the proceeds. This greatly reduces the ultimate cost of the funeral and other final expenses. And the insurance money is guaranteed, offering the client peace of mind, security and no hassles associated with administering the trust through renewals, rate selections, notices and trips to the bank.

IT IS MY OPINION THAT SINGLE PREMIUM PERMANENT LIFE INSURANCE POLICIES ARE THE BEST MEANS FOR FUNDING BURIAL TRUSTS

4.) Other Permanent Life Insurance Policies offer similar advantages for funding funeral expenses: a comparatively low annual payment rate and an appropriate tax-free death benefit, payable in full even in the event of an untimely death. Your full service funeral director can offer you an array of coverage types and payment formats. Nevertheless, the Single Premium policy is preferred, because it avoids annual premium concerns, especially in later years when paying bills might become extremely cumbersome.

5.)    Annuities are also good vehicles for funding burial reserves. When properly selected and formatted by a professional, an annuity will generate a very good rate of interest return. The tax-deferral feature of an annuity will significantly enhance that return: Every dollar placed into an annuity works as hard for the client as every dollar of interest earned. The client is free from income tax, renewal and rate worries forever, while getting a great hedge on inflation and a guaranteed minimum interest rate, regardless of how low bank rates might go. Annuities are an especially good choice for those of our readers that might not be insurable as a result of health issues.

I hope that this information helps all of you. I do urge you to pre-pay your final needs through a funeral home that (a) offers professional burial services; and (b) offers its clients the choice to pre-fund those arrangements through customized vehicles such annuities and life insurance policies.