The hidden risks of investing money in prepaid funerals

Patrick McKeough,

By Patrick McKeough,

Special to the Financial Independence Hub

Pat McKeough responds to many requests from members of his Inner Circle – a select group of customers who receive subscriptions to all four of his newsletters and are entitled to ask him specific stock and investment questions. Every week, his comments on the most intriguing questions of the 7 days go out to all Inner Circle members. Below is a highlight from these Q&A sessions.

There’s no limit to the types of financial questions Inner Circle members can ask Pat and his team of investment experts. Aside from asking for advice about investing money in specific investments (such as stocks or exchange-traded funds), members ask a wide range of other investment questions as well.

For example, a member recently asked whether there is any advantage to investing money in a prepaid funeral. So you can get a sense of how the service works, I’d like to share this question, and our answer, with you. I hope you enjoy and profit from it.

Reader Question: What’s your view on prepaid funerals? At 57 years old, it seems reasonable to me to lock in funeral costs at today’s prices and pay for it now. This makes even more sense since I can reasonably expect to live another 25 years. Funeral costs for any level of funeral have doubled every 10 years over the past 30 years, according to the brochure. Does this make sense to you?

Pat McKeough: This sounds like a consumer decision, but it’s really an investment decision, as well. When you prepay a funeral, you are investing money in a highly specialized fixed-return investment. You pay now, and get a fixed return (consisting of preselected funeral services) at an indeterminate point in the future — the few days or weeks after your death.

Investing money: Prepaid funerals may limit your options—or those of your loved ones

The one advantage you get by investing money in a prepaid funeral is that you fix the cost. However, it’s easy to spot a number of disadvantages.

For instance, you don’t get any return on the money you’ve paid, though the funeral home (or the insurer) may hold your money for decades. Depending on the plan, you may be stuck with your initial choice of funeral home, even if its service has deteriorated. You may also be stuck with your initial funeral plan, even if it’s hopelessly out of date in relation to community standards or the personal circumstances of you or your survivors.

Knowing that you are largely a captive customer, the funeral home may drive a harder bargain on related services than it would if it had to win your business as a new customer.

Funeral prices may not rise as much as you expect

When investing money or making a major purchase, it’s best to look beyond what it says in the marketing brochure. Remember, common sense alone can only take you so far. You need to base common-sense decisions on all available common knowledge. For instance, even if funeral costs have doubled every 10 years over the past 30 years, the rise may be due to special factors.

It may partly reflect the rising disposable income of the past 30 years. It may reflect a change in the ethnic mix — some nationalities prefer more elaborate funerals than others. It may reflect rising costs due to environmental regulations, or rising labour costs due to a shortage of qualified personnel. These and other cost-boosting factors may not all apply equally in the future, or at all. Some may reverse.

Before you prepay for a funeral, ask yourself if you’d buy other sorts of fixed-return investments from the same company, such as a long-term bond. If you can’t depend on the company to do something as simple as repay a loan, then why trust it to carry out your last wishes?

Do you think it makes sense to prepay for your funeral? Please share your thoughts in the comments section.

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books.


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