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Life Health > Life Insurance

Life insurance and the funeral trust

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There has been much discussion recently regarding the benefits of the funeral trust as an asset protection strategy.

Not to be confused with final expense insurance, the funeral trust is a unique product that combines the protection of life insurance with the security of an irrevocable funeral trust. For those not familiar with an irrevocable funeral trust, lets break down the two components. 

The first being life insurance, and not just any type of life insurance, but whole life insurance. In most instances the policy is funded thru single premium contributions, however, for non-crisis planning situations, multi-pay options are available. An advantage of funding the funeral trust with life insurance aside from avoiding probate costs and delays is that the growth on the policy is tax free.

Most states have limits on the amount of insurance that can be placed into a funeral trust that will be allowed to be considered a “countable” asset. It is important to make sure that any assets over that limit be placed in other asset protection vehicles to maximize the clients “non-countable” assets. If the client has qualified for Medicaid, any overfunding of funeral expenses will result in the proceeds being subject to recovery by the state Medicaid office.

The second component in the irrevocable funeral trust is the funeral trust itself. An irrevocable funeral trust, is a legal agreement in which an individual sets aside funds for the specific purpose of paying their funeral expenses. By doing this, the money set aside is no longer considered to belong to the individual, provided that the trust is irrevocable. By assigning the policy to the trust, the insured is effectively transferring ownership of the life insurance policy to the funeral trust and as a result, immediately protecting their assets from lawsuits and creditors as well as Medicaid spend down. 

Unfortunately, the majority of seniors do not have long-term care insurance, but will be needing some type of nursing home, skilled nursing or home health care at some point in their life. If they have assets that exceed the Medicaid qualification limits, they will be forced to spend down those assets in order to qualify for Medicaid.

The money in their savings, CD’s, money markets, traditional life insurance, annuities or other investments could be vulnerable. Funds set aside for their funeral planning could quickly disappear if they need to pay for long-term care.

Since Medicaid does not count the assets in a funeral trust as “countable” assets, these assignments can be made right up until the time the person has to enter into a nursing home, there is no “look-back” period for these transfers.

This asset protection strategy has been used in helping individuals who are in a crisis-planning situation and immediately need to qualify for Medicaid. 

However, the funeral trust does not always have to be used in a crisis-planning situation. Individuals can use the funeral trust as a pre-planning tool since there are additional pre-planning benefits available thru the funeral trust. 

For example, individuals can plan a funeral without planning the details. They are able to pre-pay for the costs of a funeral without picking out a specific funeral home or going to the funeral home to set aside funds, pick out caskets and other merchandise or discuss detailed plans with a funeral provider. In a study published by the Wirthlin Report, the majority of seniors believe pre-planning their funeral is a good idea.

The report also indicated that those seniors would prefer to pre-plan their funeral with their trusted advisor as opposed to being solicited by a funeral home. That does not mean that some time down the road, the individual cannot take the policy to the funeral home to plan the details.

However, most people find it a bit unsettling to go to a funeral home to pick out their casket and discuss their death. Since the funeral trust does not involve a contract to purchase any funeral, burial and/or cremation related goods and/or services from a specific funeral home it is completely portable and may be used by any funeral provider whether it be locally or if the client chooses to relocate to another area for any reason.

An important point to remember regarding the funeral trust is that once you assign a policy to the irrevocable funeral trust it cannot be surrendered, dissolved or reversed or used for any other purpose other than the individual’s funeral. If someone wants to have access to the cash value in their policy, then a funeral trust will not be for them.

This is also the upside to the funeral trust: The fact that the policy cannot be surrendered, dissolved or reversed. This ensures that the client’s wishes will be carried out and their assets protected since no one will have access to those funds; not lawsuits, creditors, Medicaid or any unscrupulous family members.

With life expectancy increasing, seniors today are concerned about protecting their assets. Most seniors are going to be needing some type of nursing care over the course of their lifetime.

Since the majority of seniors do not have long-term care, the funeral trust is a good way to protect assets so that family members are not burdened with having to come up with the funds for a loved one’s funeral or burial expenses.

The funeral trust is a safe asset protection vehicle that all clients should consider whether it be in a crisis planning situation or if they are pre-planning their final expenses. The funeral trust is the final piece in their financial planning puzzle.


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