Do You Get Money Back If a Prepaid Funeral Costs Less in the US?

Detailed Explanation

This page covers the US rules. For how the question works in general, and in other countries, see do you get money back if a prepaid funeral costs less.

In the US, prepaid (or "preneed") funerals are regulated by the states, not the federal government. The Federal Trade Commission's Funeral Rule governs price disclosure when a funeral is arranged, but the FTC itself says prepayment is covered by state law and that protections "vary widely from state to state." Some states require the funeral home or cemetery to put a percentage of the money into a state-regulated trust; others let it buy a life insurance policy with the death benefit assigned to the funeral home. Whether money comes back when the funeral costs less depends on which state and which funding method apply.

When state law requires a refund: New York

New York is one of the clearest examples. Under General Business Law § 453:

• Money paid under a pre-need agreement must be deposited in an interest-bearing account within 10 business days and stay there until the goods have been delivered and the services provided.
• Unless the agreement says otherwise, the funeral home must provide the contracted goods and services for no more than the stated price.
• If the money paid plus accrued interest is more than the cost of the goods and services when they're provided, the excess must be repaid to the person who made the payment or to their estate.
• A revocable pre-need account can be withdrawn, with any interest, at any time before the services are provided.

The exception is an irrevocable trust set up so the person qualifies for Medicaid or SSI. For those, the required disclosure says that if any money is left over after funeral and burial expenses are paid, it goes to the county.

When the trust goes to the funeral home: California

California takes a different approach. Business and Professions Code § 7735 requires all money paid under a preneed funeral contract to be held in trust until the contract is fulfilled. Under § 7737, once the funeral home files evidence of the death and shows it has provided the contracted goods and services, the trustee releases the principal and all income accrued in the trust, including interest, dividends and capital gains, to the funeral home.

So in California the growth on a preneed trust generally funds the funeral home's promise, much like a fixed-price plan elsewhere. Before the services are provided, the person who paid can revoke the trust and get the principal and income back, less a capped revocation fee. The Cemetery and Funeral Bureau regulates these trusts.

Insurance-funded preneed plans

Many preneed contracts are funded by a life insurance or annuity policy rather than a trust. The death benefit is assigned to the funeral home, and it may grow over time. If the benefit ends up larger than the cost of the funeral delivered, what happens to the difference depends on the policy, the preneed contract and state insurance law. Some contracts pay the excess to a named beneficiary or the estate; others treat the growth as the funeral home's in exchange for a guaranteed price. The policy documents and the insurer are the places to check.

Guaranteed and non-guaranteed contracts

Preneed contracts are commonly described as guaranteed (the funeral home agrees to provide the listed items at the contract price, whatever they cost later) or non-guaranteed (the money is credited toward whatever the funeral costs at the time of death). A non-guaranteed contract is more likely to leave a balance, or a shortfall, because the money is applied against current prices. The contract should say which type it is.

Things to Consider

• Find the contract first. It should say whether the price is guaranteed, how the money is funded (trust or insurance) and what happens to any excess. See how do you use a prepaid funeral plan after someone dies for what to do next.
• Ask the state regulator if the contract is unclear. Preneed funeral contracts are overseen by different state agencies, such as a funeral board, banking department or insurance department, depending on the state.
• Medicaid planning changes the answer. If the trust was made irrevocable to qualify for Medicaid or SSI, leftover money may not go to the family at all.
• Money returned belongs to the estate. Any refund is handled by the executor or administrator as part of the estate, not kept by whoever arranged the funeral.
• Moving states can complicate things. The FTC suggests asking what happens if the person moves or dies away from home, since transfers can carry extra costs.

Common Mistakes

• Assuming one state's rule applies everywhere. New York requires excess money to be refunded; California releases the trust, with its growth, to the funeral home. Check the rules where the contract was signed.
• Relying on the FTC Funeral Rule for preneed refunds. It doesn't cover them; state law does.
• Overlooking an insurance-funded plan. If a policy funds the contract, the insurer's records matter as much as the funeral home's.
• Not asking about excess money at the planning stage. The FTC suggests asking what happens to the money and its interest before prepaying, which is easier than chasing it after a death.