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Why Pre-Arrange?
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How does a life insurance policy for funerals work?

Many insurance companies offer life insurance policies that are designed to pay for funeral expenses. Typically, these policies have an increasing death benefit feature that is designed to offset inflationary funeral price increases. A common term for these small face value policies is "preneed insurance.”

 

Funeral directors who carry an insurance license often sell preneed insurance policies. Life insurance agents who do not work closely with a funeral director often sell "final expense” insurance policies. Often, using the preneed insurance approach with your funeral director is preferable so that you can ensure that the policy covers all aspects of the funeral and other services. See your local funeral director for details.

 

What if I go on Medical Assistance?

Public assistance laws change periodically, but always take into account that at least some, if not all, funeral expenses may be pre-paid.

 

For back-funded prearrangements, Minnesota Medical Assistance (MA) currently permits up to $1,500 to be set aside in a revocable trust as "burial funds,” and up to $2,000 in an irrevocable trust. These amounts are then "excluded”from assets when one applies for MA in Minnesota—that is, they are not counted as cash resources to the individual going on MA.

 

The $2,000 irrevocable "burial fund” trust may only be used if the individual is not applying for "retroactive MA”—that is, not asking the county to pay for prior medical or nursing home bills. Also, the $2,000 irrevocable "burial fund” must also be made at least one month prior to application for MA.

In addition to "burial funds,” both MA and Supplemental Security Income
(SSI) assistance programs permit an individual to pre-purchase and trust money for certain "burial space items.” Items that can be pre-purchased are casket, burial vault, crypt, burial urn, grave lot, grave opening/closing fees, and marker or monument.

If you are thinking about pre-funding or "pre-arranging” a funeral for you or a loved one, here are answers to some commonly asked questions.

More people are pre-arranging their funerals. Why is this a good idea?

Some people used to think that making provisions for one’s death was "morbid” or fatalistic. But many now realize that wills are made, inheritances arranged, and estates are planned for the very same reason: to lessen survivors’ burdens at the time of death.

Nationally and in Minnesota, pre-arranging funerals—most frequently with pre-payment (pre-funding) of a portion or all costs—is a growing trend. Pre-funding and even pre-arranging a funeral and other ancillary services associated with death, such as cemetery plots and monuments, can provide survivors with a blueprint that can help them through a very traumatic time. Without your advance guidance, the surviving family—spouse or children—may wonder about the right or "expected” thing to do. Your pre-arrangement can lend a guiding hand to help them.

At the same time, a pre-arranged funeral should not be foisted upon anyone—it’s always a matter of individual choice.


What’s the best way to pre-arrange or pre-fund a funeral?

In Minnesota, there are two ways to pre-fund a funeral: a bank trust or an insurance policy. To use a trust, your Minnesota funeral director can provide you with special forms provided to set aside money for you in a trust at a federally-insured bank or savings & loan association.

You may ask your funeral director about purchasing a small-face value insurance policy. The cash proceeds of this policy can be used to pay for funeral and burial costs. Your local funeral director will know of life insurance agents in your area who specialize in life insurance policies designed to cover funeral expenses, and many funeral directors are licensed life insurance agents.

Can’t I just work with my insurance agent?

A licensed funeral director is the only person who has the experience and training needed to give you a thorough understanding of all facets of pre-arranging. The funeral director is not only well-versed in all types of funeral services, but he or she knows about the laws regarding trusts, insurance, and public assistance rules.

Do I consult anyone else?

By all means, consider the wishes and feelings of the family. Often, people pre-arrange because they want to spare survivors the "painful” task of making funeral arrangements, but in fact do the opposite. You should instead involve your survivors whenever possible in your pre-arrangement discussions. At the same time, do not force participation on anyone who feels uncomfortable about discussing or making pre-arrangements.

But it’s my funeral. Why should I involve my family?

Funerals are for the survivors. The funeral serves as on-going testimony that a life has been lived. It serves as a last act of recognition, honor, respect, and reunion of heartfelt memories. It is a gathering of social significance. Survivors have emotional needs to be served. Expressing grief is one of these needs. The advantage of involving survivors in pre-arranging also brings the formerly "taboo” subject of death into the open. It affords the family the opportunity to share their thoughts together about funeral services.

How can I be sure that my pre-arrangement is followed?

Pre-arranging doesn’t guarantee that all arrangements will in fact occur as planned, but it does offer your survivors the opportunity to follow your wishes. Because there is no advance way of knowing exactly when, where, how, and under what circumstances death will come, or what services or merchandise will be available in the future, the original plans could change. Still, sound planning significantly increases the likelihood that your desires will be met.

Do funeral directors charge for making pre-arrangements?

No. Minnesota Funeral Directors Association members, as licensed practitioners of funeral service in our state, do this as a service to you.

How do I choose the best way to fund my pre-arranged funeral?

Your Minnesota funeral director can advise you about the differences between the two legal and regulated methods of setting aside funds for future funeral and burial: the funeral trust and "preneed insurance.” ("Preneed insurance” is simply a life insurance policy taken out with the understanding that policy proceeds will be used to pay final expenses at the death of the policy holder.) The choice of funding vehicle is ultimately yours.

What happens to the funds?

In the case of funeral trusts, the money goes into a an interest-bearing, federally backed account in your name at a bank, savings & loan, or credit union. Typically a Certificate of Deposit (CD) is used for the funeral trust. The interest is taxable to you via an IRS Form 1099 being issued to you by the financial institution at the end of each year. In the case of "preneed insurance,” you purchase a life insurance policy or annuity whose face value will be sufficient to pay for the future funeral and burial.

Such a policy should be an increasing benefit ("growth”) policy, so the death benefit grows to keep pace with inflation, just as the interest on a funeral trust will grow to counter inflation.


How does a funeral trust work?

Under Minnesota law, a person enters into a pre-paid funeral trust agreement with the funeral home. The funeral home must deposit 100 percent of these funds in an insured account in your name at a bank, savings & loan, or credit union. The funeral home cannot claim any funds until services have been performed. Any excess amount in trust (from the interest accumulation of the CD) reverts to your estate. Funeral trusts can be revocable (i.e., the money paid in may be taken back) or irrevocable (must be used to pay funeral/burial expenses).

The value of these pre-purchased "burial space items” do NOT count as an asset to the person applying for MA or SSI, provided that the purchase is made prior to the month of application for assistance.

When life insurance policies are used to pre-pay funeral expenses, often there is no limit to the amount of funds that can be set aside for funeral services and merchandise. However, for Medical Assistance to exempt the policy, it must be irrevocably assigned to any funeral home, name the estate as the contingent beneficiary, and be accompanied with a statement of goods and services selected from a funeral establishment.

For free information on "asset exclusions” for persons applying for MA or SSI in Minnesota, contact your local funeral director or your county’s social services eligibility office.

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