Trap 4: Prepaying without precaution

Shopping around for the most suitable and affordable funeral goods and services is a good consumer practice. However, be extremely cautious about paying for them in advance by entering a preneed contract.

Funeral home personnel often urge that prepaying is the wisest, kindest route, allowing individuals to choose their final arrangements while sparing survivors the pain of having to do so. For some people, that's true.

But there are potential drawbacks. For example, when a funeral home goes out of business, the consumer who has prepaid for goods and services there may be left without recourse. Also, many individuals who relocate are dismayed to find that their prepayment funds aren't refundable, or that there's a hefty fee for withdrawing or transferring them. In addition, money paid now may not keep up with the inflated costs of the future, leaving survivors to foot the bill for the extra amount. Many consumer protection groups flatly oppose the practice, instead recommending the mantra, preplan, don't prepay.

Consumer complaints about mismanaged funds have led to a number of state and federal legal controls on how the money can be handled and invested. The National Funeral Directors Association has also recently advanced guidelines aimed to ensure ethical dealings. Laws controlling prepayment funds currently differ from state to state. For specifics in your area, contact a local funeral or memorial society.

How to avoid the trap

Prudent possibilities exist for those who wish to set aside money to pay for final arrangements -- or to make sure they get what was paid for with prepayment funds.

Alternatives to prepaying. There are a number of ways to designate a particular account or fund of money to cover the cost of your final arrangements and arrange to make it available to individuals you trust to carry out your specific end-of-life wishes after your death.

• Totten Trust. This is a trust or savings plan, set up through a bank or savings institution, earmarked to pay for final arrangements. You control the account during your lifetime and are free to withdraw from it at any time. Interest accumulated in the account will often cover the costs of inflation for funeral goods and services. And the funds will be available immediately at death, without being delayed by probate as they would if designated in a will.

• Joint account. You can open a separate account, such as a certificate of deposit or shared bank account, with someone close to you who will agree to use the money for your funeral as you direct. Or you could name your estate as the beneficiary with directions to the executor of your will to use the funds for funeral costs. However, in this instance there may be some delay in releasing the funds while the will is processed.

• Insurance. Life insurance or an annuity contract may provide for a death benefit that will at least partially pay the costs of final arrangements. You may choose the beneficiary you want to control the funds, and you can name a reliable friend or relative who agrees to carry out your wishes.

Prepayment safeguards. If you enter into a prepaid agreement, get a copy of the contract clearly explaining its terms. Review the document, including all fine print, before signing it. Tell friends and members of your family about it so that they won't unknowingly make other arrangements at the time of need.

Also be sure to get the answers to a number of basic questions about the arrangement, including:

• Which items have guaranteed prices that will not increase at the time of death, and which are nonguaranteed (meaning the price may increase)?

• Is there any control if the costs increase in the future?

• Where will the preneed payments be invested? If they're to be used to buy an insurance policy, what's that company's rating? If payments go to a trust account, what bank or institution will be holding them?

• What happens to interest that accumulates on the money paid?

• What if the funeral home goes out of business before I die?

• What if I move or die away from home and don't use the prepaid services?

• If the funds are transferred to another funeral establishment, is there an added charge?

• Can I cancel if I change my mind? Are there cancellation fees?