A preneed funeral contract is a written agreement between you and a funeral home that spells out which goods and services the funeral home will provide at your death and how those costs will be paid. You pay now, either into a trust account or through a life insurance policy, and the funeral home commits to delivering what the contract lists when the time comes. People use these arrangements to lock in prices, spare their families from making decisions under grief, and in some cases to qualify for Medicaid or Supplemental Security Income.
What the Contract Covers
A preneed contract itemizes two separate categories of expense, and the difference matters because only one is usually protected against future price increases.
The first category is the funeral home’s own goods and services: a casket or cremation urn, an outer burial container if the cemetery requires one, the funeral director’s professional time, use of facilities for a viewing or memorial, embalming or other preparation you authorize, and transportation of the body.
The second category is what the industry calls “cash advance items.” These are third-party costs the funeral home pays on your behalf and passes through to you. Cemetery fees for opening and closing the grave, certified death certificates, obituary charges, flowers, and honorariums for clergy or musicians all fall here. The funeral home doesn’t control the pricing on any of them. If your contract lists a specific dollar figure for a cash advance item, that figure can be higher by the time the contract is used.
Guaranteed vs. Non-Guaranteed Pricing
This is the distinction most buyers overlook, and it determines whether your family writes a check at the time of death.
A guaranteed-price contract commits the funeral home to providing the selected goods and services at no additional cost, regardless of how much prices rise between the signing date and your death. The funeral home absorbs the inflation. The guarantee almost always applies only to the funeral home’s own merchandise and services, not to the cash advance items described above.
A non-guaranteed contract is essentially a dedicated savings arrangement. Your payments are set aside and invested, but if the total cost at death exceeds what you paid plus any growth, your family covers the shortfall. If the funds exceed the final cost, the surplus is usually refunded to the estate, though that varies by state.
Before signing, ask directly whether the contract is guaranteed or non-guaranteed, then read the language to confirm. Wording like “the funeral home agrees to provide selected goods and services at no additional cost” signals a guarantee. Hedged language about “funds available at time of need” generally does not.
Revocable vs. Irrevocable
Preneed contracts also split along a second line: whether you can get your money back.
A revocable contract lets you cancel, change, or transfer the agreement. If you cancel, you receive a refund of the principal and usually any accrued interest, minus any cancellation fee state law allows. The flexibility comes at a cost for benefit planning: because you can still reach the money, it stays a countable asset for Medicaid and SSI purposes.
An irrevocable contract permanently dedicates the funds to your funeral. After a short waiting period, often around 30 days, you can no longer cancel or withdraw the money. In most states you can still transfer the contract to a different funeral home, but you cannot take the cash out. That rigidity is exactly what makes irrevocable contracts work for benefit planning.
How the Money Is Held
Preneed contracts are funded in one of two ways, and the mechanics affect how the money is protected and taxed.
Trust Funding
Your payments go to the funeral home, which deposits a state-mandated percentage into a trust account. The required percentage varies by state. Investment earnings accumulate in the account and are intended to offset inflation.
Those earnings are taxable. If the trust qualifies as a Qualified Funeral Trust, the trustee files a separate tax return with the IRS and pays tax at trust rates, so you and your family don’t deal with the paperwork.1Internal Revenue Service. About Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts For most preneed trusts the annual earnings are modest enough that the tax is small.
Insurance Funding
With an insurance-funded contract, you purchase a life insurance policy and assign the proceeds, or full ownership, to the funeral home.2Social Security Administration. POMS SI 01130.425 – Life Insurance Funded Burial Contracts and the Burial Space/Funds Exclusions Premiums go to the insurance company rather than the funeral home. When you die, the insurer pays the death benefit directly to the funeral home. The payout is the policy’s face value regardless of investment performance, and the policy can generally follow you if you switch funeral homes.
Medicaid and SSI Implications
Medicaid and SSI both cap how much you can own in countable assets. Placing money into an irrevocable preneed funeral contract removes those funds from your countable resources because you can no longer reach them for any other purpose.
The Social Security Administration excludes irrevocable burial contracts from the SSI resource calculation entirely, provided the contract cannot be revoked and cannot be sold without significant hardship.3Social Security Administration. POMS SI 01130.420 – Prepaid Burial Contracts SSI also provides a separate $1,500 exclusion for burial funds that are set aside but not placed into a preneed contract, reduced by the face value of any life insurance policies you own whose cash surrender value has already been excluded.4Social Security Administration. Code of Federal Regulations 416.1231
Medicaid rules are administered at the state level. Most states cap how much you can place into an irrevocable funeral trust, with the majority setting the limit somewhere between $10,000 and $15,000 per person. A revocable contract remains a countable asset under both programs.
One detail catches families off guard. If you received Medicaid during your lifetime and money remains in the irrevocable account after the funeral is paid, the state may claim the surplus to reimburse itself for the benefits it provided. Neither the funeral home nor the estate keeps that remainder until the Medicaid recovery claim is satisfied.
Your Rights Under the Funeral Rule
The Federal Trade Commission’s Funeral Rule applies whether you’re arranging a funeral at the time of death or planning years ahead.5Federal Trade Commission. Funeral Rule A few protections matter most when buying preneed.
The funeral home must give you a General Price List showing the cost of every good and service it offers, before discussing arrangements. That lets you compare providers and avoid packages that include things you don’t want.6Federal Trade Commission. Funeral Industry Practices Rule You can buy items à la carte rather than taking a preset package; the only non-declinable charge is a basic services fee covering the funeral director’s overhead. And if you buy a casket or urn from a third-party retailer, the funeral home cannot charge a handling fee for using it.7Federal Trade Commission. Complying with the Funeral Rule
States add their own rules on top. Most require funeral homes to be licensed before selling preneed contracts, regulate how preneed funds are held, and mandate written disclosure of cancellation terms before you sign.
Transferring or Canceling the Contract
If you move or change your mind, most states allow you to transfer a preneed contract to a different funeral home. This holds for both revocable and irrevocable contracts in most places. The current funeral home coordinates the transfer of funds and contract terms to the new provider. Ask both the outgoing and incoming funeral homes what paperwork and fees are involved, because state rules govern the process.
Cancellation depends on the type of contract. A revocable contract can be canceled for a refund, less any cancellation fee state law permits. An irrevocable contract generally cannot. If the funeral home is sold, the new owner typically assumes existing preneed obligations, and you should receive written notice of the change.
Making Sure the Contract Gets Used
A preneed contract does nothing if no one knows it exists. Families have paid for brand-new funeral arrangements out of pocket because the person who signed the contract never told anyone about it.
- Give at least two trusted family members the name of the funeral home, the contract number, and the location of the original paperwork.
- Include the contract details in your estate planning file alongside your will and power of attorney.
- Keep the copy somewhere family can actually reach it. A safe deposit box can be hard to access immediately after a death; a fireproof home safe or a clearly labeled folder works better.
Read the full document before signing, not just the itemized list of services. Check the cancellation policy, the guaranteed or non-guaranteed pricing language, the trust or insurance funding details, and any transfer fees. Keep a signed copy, and revisit it every few years to confirm the arrangements still reflect what you want.