Here’s the last installment of the great information from guest blogger Gary Newman, maven of finances related to end-of-life issues.
Recalling that, because dying is a regular part of living, and nobody yet has told us how a way to avoid it, we need to think about and plan for it, just like everything else. And recalling that we all know our DOB’s, but not our DOD’s, we’d better get on with our dialogue about it.
More of my thoughts, to add to yours:
What about those pre-paid “pre-need” funeral and burial plans?
They’re prepaid fixed-price contracts, specifying guaranteed at-death funeral company and cemetery/crematory services and facilities to be furnished at time of death, but pre-selected at the time of purchase. They can be desirable ”win-win-win” arrangements for us, for Loved One, and for the vendors, if the elements are analytically selected, and are right for both the present and anticipated future circumstances.
In most states, consumer protection laws protect us. Typically, the contracts are trusteed, to survive a provider’s evaporation or misappropriation. Funds are escrowed in insured bank CD’s. The cost of contracted items not used at time of death is refundable, or transferable to other, non-pre-arranged items at prices in effect at time of pre-payment. Unless “irrevocable,” to qualify the client for Medicaid, VA, and other entitlements, the client can revoke the entire agreement for full refund.
Certainly, it would be wise to check for these protections in any prepayment arrangement, and to have all of them in writing.
Some providers also offer plans to cover the cost of being retrieved and shipped home in case of out-of-town death.
And, of course, copies of all the contractual documents should go into the person’s doomsday manual (covered in a recent column — want it?)
There are advantages:
- Pre-paids can be exempt from Medicaid and Social Security S.S.I. qualification criteria.
- In the case of very long-standing contracts, pre-paid items paid for have become bargains. Prices have escalated over the years, in my hometown sixty percent higher than ten years ago. One national company even says that the cost of funerals doubles every ten years.
- The family has rapport with the provider company, and is relieved of the stressful at-death horrors of arguing about, and deciding and negotiating which items to purchase,
- The family also is relieved of having to front the money, typically six to twelve thousand dollars, because the person died without sufficient available liquid assets.
- The client is assured that his/her wishes will be honored, at least as they were at the time of purchase.
- The availability of the services at time of need is assured by the trust and the funding medium, obligating providers or successor providers to deliver, even if the original contracting company no longer exists, or the economy tanks.
And, yes, there can be disadvantages, too:
- Contracts not consumer-protected by law can be irrevocable, nonrefundable, and inflexible. Does anyone not change their mind about things over time? The option to change providers, or to delete items which have become excessive or unnecessary over the years by the time we die might be limited. Some covered services and funeral or interment providers can be “Use it or lose it”, nonrefundable and non-transferable. Check carefully!
- You can’t move cemetery lots to another community where the family has relocated, nor are they readily saleable. Fortunately, some cemetery companies offer out-of-town exchange plans, sometimes at no extra cost, but sometimes at an uncertain, and perhaps costly, price. The same goes for funeral companies.
- The family might find itself with no choice of providers other than those specified in the contract, thus finding itself locked in to a provider who has become undesirable.
- If the client lives for many years after pre-arranging, who can predict what substitute providers and arrangements then will be available if the original provider is long-since out of business?
- Instead of up-front funding, can one beat cost inflation by investing dedicated funds successfully until time of need? Maybe. With luck, investment management expertise, decades of time, favorable income taxes on the yields, economic prosperity (especially at time of need), and tenacious self-discipline, one might succeed. But those are very, very big and awesome “maybes”! A plaque in a financial planner’s office reads: “Dumb luck always beats smart planning”.
- Interest credited on the funding can be income taxable, but not available, to the customer.
So, what about alternative plans?
- The person can specify binding at-death wishes and instructions, anything and everything, in the testamentary will, or hoped-for preferences in the legacy letter (ethical will), and can change and update them whenever amending either of the wills. One can simply tell the family what he or she wants, sometimes a deathbed proclamation, and hope that the family will comply.
- One also can “self-advance-fund” final expenses, by designating or even trusteeing existing financial assets. This appeals to those of us who want to keep control, or are willing to sacrifice some control in favor of estate-tax shelters by creating an irrevocable trust.
- We can advance-plan contract, but not pre-pay, a set of arrangements with the provider, revocable, of course, and the at-time-of-need prices will apply.
Life’s miracle financial tool:
Life insurance can do more for us than we might think. If one is young enough and favorably insurable, or already insured, well-chosen and well-managed life insurance almost always is the least-cost long-term funding. In “normal” economic times, (if ever “normal” occurs!), successful investments, by themselves or together with life insurance might be expected to grow over time, to cover price inflation.
Caution: Conventional life insurance is absolutely reliable, but not always an adequate inflation hedge. Variable life can be, and has some guarantees. But, of course guaranteed alternative investment isn’t productive, and non-guaranteed is long-run risky. Further, it takes a lot of self-discipline to maintain and fund adequately a voluntary, discretionary plan over decades of time — ‘Druthers like vacations, new cars, and children’s college bills often win.
Some create a life insurance solution at the beginning. and gradually reduce it over time if and when earmarked investments grow sufficiently to cover the need.
Many of us have excess life insurance no longer needed for family or business purposes. It can become the least painful way to fund all kinds of “final expenses,” including pre-paids, in the estate plan. Policy ownerships and the beneficiaries can become, or can be transferred to, the providers or to trusts, or benefits can be collaterally or absolutely assigned.
By insuring the cost, the client doesn’t have to give up any precious cash. Nor must we sacrifice many years’ (hopefully!) future yields by liquidating investments. And our heirs will remind us that their full inheritance remains intact.
If necessary, policies requiring continuing premiums can be changed to “reduced paid-up” status. Or, payable future premiums still are a lot cheaper than the burden of having to pay out the entire pre-arrangement contract price in cash and in advance, especially if those premiums can be reduced by crediting future dividends to them.
Three more ideas:
Would the folks at the funeral or memorial service be inspired by the person’s favorite verses and musical pieces, and by excerpts from the memoirs and ethical will?
Children grieve too, and they struggle with the burdens of groping to understand death and trying to express their feelings. A marvelous free children’s help kit is yours at www.sesamestreet.org/grief.
We can be uninhibited with funeral directors. They’ve metamorphosed into compassionate, smiling humans, just like us.
Now, after all this, let’s close upbeat: Grandpa would exclaim; “L’chaim! To life!”
Gary Newman is an actively retired life underwriter and practitioner of related family and small business financial security disciplines. He holds degrees from the Wharton School of Finance at the University of Pennsylvania and the American College of Life Underwriters, and is an emeritus member of the Washington, D.C. Estate Planning Council and several other professional societies. You can reach him at [email protected]