The high cost of saying goodbye (pg. 6)

  @Money November 9, 2012: 9:25 AM ET

Problems with prepayments

Prepaid arrangements promise to save your family money and stress by allowing you to plan a funeral and lock in prices years early. You choose the arrangements and pay the bill upfront. The money goes into a trust account or an insurance policy until the services are needed. Good deal, eh?

Not so much. With charges ranging from difficulty getting refunds to mismanagement of funds, prepaid contracts are high on the list of complaints about the death-care industry, the MONEY survey of states found.

In Kansas, for example, 28% of complaints over the past five years have been about such products; in Maryland they were the top complaint, at 38% of the total. Indeed, paying in advance for funerals has proved so problematic that the FTC, AARP, and the Consumer Federation of America all recommend against it.

Yet prepaid sales are up sharply. At Service Corp. International (SCI), the largest funeral chain, prepaid contracts rose 28%, to $1.1 billion, over the five years ending in 2011, according to the company's financial statements.

That success is due at least in part to clever marketing that combines standard sales pressure with emotional tugs.

At a recent SCI free-dinner seminar in Davie, Fla., speakers stressed that funeral planning is complicated ("There are 72 different decisions to make!") and draining ("We don't want you coming here on the worst day of your life!").

Sales reps at each table urged attendees (including a MONEY writer) to fill out a questionnaire about their preferences, which were entered in a drawing to win a Kindle. And if you signed up by month's end, you'd get a 20% discount -- on what was unclear, since no price lists were handed out. Asked about the appropriateness of those sales tactics, an SCI spokesman simply said the product was a good deal for consumers.

Signing up often seems like a low-risk proposition, since providers usually promise you can transfer your contract to another facility. However, seven states don't guarantee the right to transfer your contract, and two more allow it only if you relocate -- you can't just change your mind, according to a 2011 NFDA report. Depending on the state, you may also have to pay fees to make the switch.

Laws also differ about how much, if any, refund you're entitled to. If your contract allows you to cancel, you may pay a fee ranging from interest earned on the account to 25% of its value. Loopholes in the terms may further reduce your refund.

States require funeral homes and cemeteries to set aside a percentage of the money customers prepay. But some allow providers to keep funds paid for merchandise if they can show they've delivered it -- sending an urn to your home or storing a casket for you in a warehouse.

Advocates say some places inflate the value of the merchandise to avoid setting aside or refunding your money. In 2009, Neptune Society, a cremation company, paid $630,000 to the state of Colorado to settle accusations it did just that -- for example, charging $349 for an urn valued at about $13.

Related: Hey Social Security, I'm not dead!

The Department of Insurance is still investigating to see whether the practice continues, says spokeswoman Marianne Goodland. Neptune says that it follows all rules on trusts and refunds and the situation in Colorado was an isolated incident.

It's also possible to shell out thousands more on a prepaid contract than the funeral costs. That can happen when you buy an insurance policy and pay over time instead of in a lump sum, as Jo Swiger's family discovered.

In 2004, at 89, Swiger bought a Lincoln Heritage Life policy to cover expenses for the $8,700 funeral she had chosen and spread payments over three years. Cost: $15,688 in premiums.

After her mom died in 2011, daughter Ann Bauer learned that the policy, which had a savings account that grew over time, would pay out only $10,807. "I don't understand how they can call that an insurance policy," says Bauer, an account manager at a San Diego radio station.

Lincoln vice president Shirley Grossman says most of its customers are younger and have time for benefits to grow, and adds that Lincoln no longer sells multiple-payment policies to customers over 85. But anyone who pays over time can expect to pay 40% more than the arrangements' price, says William Stalter, a Kansas lawyer who helps funeral homes create prepayment plans.

Finally, regulators report frequent and rising instances of mismanagement and fraud with prepaid contracts, a December report from the Government Accountability Office found. Regulation is uneven, and many states lack the funds to enforce the rules, says Lynne Nelson, compliance manager of Oregon's funeral and cemetery board.

WHAT YOU SHOULD DO

Just say no. You don't need to buy a special product to set aside money for final arrangements. You may have enough life insurance to cover the bills. Or, set up a "payable on death" account at the bank, making funds available once there's a death certificate to reimburse funeral expenses. If you don't want your family to have to put up the money in advance, create a joint savings account with someone you trust to pay the bills.

Kurtinitis and her husband, George, don't want their family to endure what she and her mom did when it was time to put her stepdad to rest (they're still trying to sell the unused caskets and plots on Craigslist). So they've planned burials in a military cemetery (he is a vet) and a simple viewing in their home. "We don't want our family to end up with a bill for thousands," she says. "People need to remember: This is your family member, your burial, your business." To top of page

Next month: Money magazine will feature Part Two in the series, "In Search of a Better End," about managing the care of costs of a terminally-ill loved one; and Part Three, "Looking Beyond," a profile of a man dealing with Lou Gehrig's disease and planning for his wife's financial future without him.


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