Dave Ramsey says: Pick preplanning over prepaying for funeral
My grandmother passed away a week ago. She was 98, and I know both she and my grandfather had prepaid for their funerals in 2004.
However, there were outstanding costs of $1,500 with the funeral services we had to pay out of pocket, because she had outlived the insurance policy attached to the prepayment plan.
I know you say it’s always better to preplan, not prepay, for a funeral. Can you refresh my understanding of this?
Let’s use a round figure, and say the cost of a funeral is $10,000. What would $10,000 grow to 25 years from now if it were invested in a good mutual fund?
Now, juxtapose that number with the increase in the cost of a funeral over that time. The average inflation rate of consumer-purchased items is around 4 percent.
So, the cost of funerals, on average, has risen about 4 percent a year. By comparison, you could’ve invested that money, and it would’ve grown at 10 or 12 percent in a good mutual fund.
Now understand, I’m not knocking folks who are in the funeral business. But lots of businesses that provide these services realize more margin in selling prepaid policies than they do in caskets.
In other words, they don’t make as much money selling the casket as they do selling a prepaid policy on the casket.
Do you understand my reasoning? If we knew the exact date she prepaid, and how much she prepaid, that figure invested in a good mutual fund would be a whole lot more than the cost of a reasonable funeral.
It’s the same principle behind the reason I advise folks to not prepay college, or just about anything else, that’s likely far into the future.
The money you could’ve made on the investment is a lot more than the value of prepaying. Preplanning, on the other hand, is a great idea for many things — including funerals.
I’m truly sorry for your loss, Rebecca. God bless you all.
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