Dear Dave,

I’m 67, and I’ve been wondering what your position is on preplanning for a funeral versus prepaying. Is one a better idea than the other, or should you do both?

— Shannon

Dear Shannon,

This is a great question. I wish more folks would think about these kinds of things ahead of time.

Preplanning a funeral is truly a gift to your family. But if you prepay, it’s a gift to the funeral home. Doing the legwork and setting things up ahead of time so your family doesn’t have to make a lot of financial decisions in the middle of an emotional situation shows them respect and consideration.

When you buy a prepaid plan, you could be years or decades away from needing it. Plus the inflation rate on funerals is about 4%, so in essence, you’d be making 4% on your money. And, of course, you’re locked into everything at that point. If you took the cost of a funeral and invested it at age 30, instead of 4% on your money, you’d get an actual investment return. By the time you’re 80, you’d have about $600,000. So prepaying in your 30s or 40s is mathematically ridiculous. Now, if you’re in your 60s, like you and me, there aren’t as many years for that money to grow. You wouldn’t see a huge return on investment, but it would still provide for a nice service.

Believe it or not, it took me a while to figure out that the funeral world is an industry—an extremely profitable industry. And like with many things, when you add on stuff like financing or prepayment to a purchase, you’re adding to their profits. Most funeral providers make as much money on prepayment plans as they do in actual margin on the goods and services that go along with this kind of thing.

That being said, I’ve got no problem with a business or industry making money. If they treat their customers well, no one’s taken advantage of, and a quality product or service is provided, it’s all good. But when it comes to funerals, I tell people to preplan. Don’t prepay.

— Dave