When you pre-pay your funeral expenses, we calculate how much money it would cost today and then that money gets put away in your name to cover the cost of your funeral at the time it is needed. So lets say that you wanted to pre-pay your funeral today and the cost of everything you included in your prepaid contract came to $10,000. That money gets put away in your name and starts to earn money. If you pass away in 5 years, we will calculate how much everything that you included in your pre-paid funeral contract would cost then. Let’s just say that everything by that time might come to $12,000. Theoretically there will be enough money plus interest in your investment to cover the cost of the funeral when you pass away. If there is not enough money in your investment to cover the costs, then the Funeral Home takes that loss and if there is too much money in your investment to cover the costs, then your beneficiary will receive the extra money. And as long as the money you put away is used for funeral expenses, you don’t have to pay income tax on the interest that you earn over the years.
So what happens when you pre-arrange your funeral and want to pay over time? Going back to the first paragraph with those hypothetical amounts, the goal is that in 5 years there will be $12,000 to cover your funeral expenses, and that should happen when the full amount is put away at once and starts to earn interest. So then, to achieve that same result when you make monthly payments into a trust or annuity, your payments are adjusted so that you will have paid $12,000 at the end of five years. Some people think that you are paying interest, but you aren’t. You will have paid $12,000 but you will also have the full $12,000 in your investment plus whatever interest or growth it has accumulated over that time.
If you have questions about this or any other questions about pre-arranging or pre-paying your own funeral service, don’t hesitate to call.
Until next week,