In New Jersey, there are three ways to prepay or prefund a funeral.
1. Establish a prepaid funeral trust fund account.
Your first funding option is to open a prepaid funeral trust account. You can open a revocable or irrevocable account. Trusted moneys in revocable accounts are 100% refundable on demand by the purchaser and with interest. You may also change the funeral home and the selected funeral services or merchandise at any time without penalty. (Note: Irrevocable trust accounts for SSI/Medicaid and General Assistance recipients are non-refundable.)
When choosing a funeral trust fund, keep the following in mind:
- 100% of the principal and interest must accrue to the benefit of the trust fund (less a trustee's fee of a maximum of 1 percent).
- All moneys provided to the trust must be deposited in an FDIC insured bank account.
Most New Jersey funeral directors use the New Jersey Prepaid Funeral Trust Fund™ (NJPFTF), which is a commingled trust offered through the New Jersey State Funeral Directors Association, Inc., to prearrange a funeral. However, there are other products available.
2. Assign existing life insurance policy or policies to the funeral home.
A funeral can be prepaid using the proceeds from an insurance policy. If prudent to do so, a person can cash out the value of the policy and place it in a funeral trust fund to cover the costs of a prearrangement. If cashing out the policy is not a prudent option for the individual, the funeral home can complete a revocable or irrevocable insurance assignment on the proceeds of the policy. To do this, the funeral home is named as the policy's owner. The policy's proceeds are then either revocably or irrevocably assigned to the funeral home to be used as payment for all funeral costs at the time of death.
In the case of an irrevocable absolute assignment, the Treasurer-State of New Jersey is named primary beneficiary on the policy, thus allowing any and all funds remaining after the funeral bills are paid to go to the state, as required by New Jersey's mandatory asset recovery law. With revocable insurance assignments, any remaining moneys after the funeral bill is paid will be returned to the primary beneficiary.
3. Purchase funeral insurance or an annuity.
N.J.S.A. 17B:17-5.1(a) defines funeral insurance policies as insurance policies or annuity contracts that are intended to provide, and explicitly marketed for the purpose of providing funds to the provider at the time of the insured’s death in connection with a prepaid funeral agreement.
The following legal guidelines apply to prearrangements funded through newly issued insurance or annuities:
- Insurance and annuities specifically sold to fund a preplanned funeral arrangement in New Jersey may only be issued by a licensed funeral director who is also licensed to sell life insurance (not all funeral homes offer this option).
- The insurance contract must have been approved by the New Jersey Department of Insurance to be used in conjunction with funeral preplanning.
- The funeral director must disclose whether or not he or she will earn a commission from selling you this policy.
- Upon death, the insurance proceeds are paid directly to the funeral home. The premium for this policy is the current cost of the funeral.
- Unlike a trust where the moneys are 100% refundable, insurance and annuity policies are not liquid. However, you may surrender your policy at any time. You will be paid only an amount equal to the cash value of the policy less any indebtedness.
- Irrevocable insurance policies and annuity contracts for SSI/Medicaid recipients are non-refundable.
Ask your funeral director about the prefunding options available to you and your family.