Prepaid Funeral Plans: How They Work and the Traps (2026)

By Steve Levine · Updated September 24, 2026

Prepaid funeral plans let you choose and pay for a funeral in advance, usually through a contract with a funeral home that is funded by a trust account or an insurance policy. Whether a plan protects you or quietly loses value depends on where your money is held, what you get back if you cancel, and whether the plan still works if you move or the funeral home changes hands.

Those rules are set by each state, not by one national law. The FTC’s advice on planning your own funeral says so directly: states have different requirements for handling money paid for prearranged funerals. This guide uses two states, Texas and New York, to show how differently the same contract can work, and lists the questions that apply everywhere.

How prepaid funeral plans are funded

According to the Texas Department of Banking, which regulates prepaid funeral contracts in that state, there are two funding options, and a seller may offer one or both.

	Trust-funded plan	Insurance-funded plan
Where your money goes	Deposited with an approved bank or trust, held until the death	Pays premiums on a policy whose benefit goes to the funeral provider
Who regulates it (Texas example)	Department of Banking	Department of Insurance, for the policy itself
If you cancel (Texas example)	Usually what you paid in, minus 10% of the contract’s face value	The policy’s cash surrender value
Main risk	Seller keeps part of your payments; tax on earnings	Reduced benefit if death occurs early on some limited-benefit policies

The FTC describes the same two routes more generally: some states require a funeral home or cemetery to put a percentage of the prepayment into a state-regulated trust, or to buy a life insurance policy with the death benefit assigned to the provider.

Where the money is held: two states compared

Texas

With a trust-funded contract in Texas, the seller must deposit your payments in a Department-approved financial institution within 30 days of receiving them. But the seller may keep 50% of each payment, up to 10% of the total contract price, for its selling and administrative expenses. So the trust may never hold everything you paid.

If you cancel a trust-funded Texas contract, the benefit in most cases is the amount you paid in, less 10% of the total face value. For contracts sold after September 1, 2001 and held for more than a year, you also receive 50% of the net accrued earnings. The seller has 30 days from receiving your completed cancellation forms to pay you.

New York

New York’s General Business Law section 453 is stricter. Money paid under a pre-need agreement must be deposited in an interest-bearing account within ten business days. For a revocable agreement, everything you paid, plus any interest earned, must be repaid on demand at any time before the funeral. The law also bars administrative, consultation or other fees charged to the buyer for setting up the agreement.

The difference is real: on a revocable contract, a New York buyer can get all of their money back with interest, while a Texas trust-funded buyer typically loses 10% of the face value on cancellation.

The traps to watch for

1. “Guaranteed” does not always mean everything

A contract may guarantee the funeral home’s own goods and services but not items it buys from others, such as cemetery charges or flowers. Texas says a fully paid trust-funded contract must be delivered at no additional cost, but that where a family pays for transport back to the original provider, the contract is honored “plus any unfunded cash advance items selected by the family.” Ask which items are guaranteed and which are only estimates.

2. Moving, or dying away from home

The FTC’s list of questions includes what happens if you move or die while away from home. Texas spells out one answer: a funeral home near where the death happens has no legal obligation to honor another provider’s contract prices. The family either pays to transport the body back to the original provider, or pays a new provider. Some plans can be transferred, but the FTC notes this is often at an added cost.

3. Changing your mind about details

In Texas, you cannot modify the goods and services in a prepaid contract once it is signed. There are no downgrades or partial cancellations; to change anything you cancel the whole contract and sign a new one, with the cancellation terms above. Texas also says funeral homes are not required to refund or credit unused items in a package sold at a single price.

4. The provider closes or changes owners

The FTC tells buyers to ask whether they are protected if the firm goes out of business. The worst case is not hypothetical.

In 2013 the US Attorney’s Office for the Eastern District of Missouri announced sentences for six people behind National Prearranged Services, which sold preneed contracts from as early as 1992 until 2008. The court found they had defrauded more than 97,000 customers in more than 16 states, causing more than $450 million in losses, by using money that was supposed to sit in trusts or insurance policies for other purposes.

If the funeral home is sold, ask the new owner in writing to confirm it will honor your contract, and keep that letter with the contract. Check who holds the trust or policy, not just who sold you the plan.

5. Taxes on trust earnings

Texas notes that with a trust-funded contract, you or your estate may owe tax on interest earned on the deposits, even though those earnings are never paid to you. It points to IRS Revenue Ruling 87-127 and Internal Revenue Code section 685.

6. Nobody knows the plan exists

The FTC warns that if relatives do not know about your arrangements, they may pay twice or fail to follow your wishes. Give a copy of the contract to the person likely to handle your funeral.

Prepaid plans, SSI and Medicaid

For people who receive, or may need, Supplemental Security Income or Medicaid, how a plan is structured affects eligibility. Under federal SSI rules in 20 CFR 416.1231, up to $1,500 each for an individual and spouse can be excluded from countable resources if it is specifically set aside for burial and kept separate. Burial spaces, such as a plot, vault, headstone and the opening and closing of the grave, are excluded separately.

States build on this. New York’s Medicaid directive 11 OHIP/ADM-4 explains that since January 1, 1997, a pre-need agreement set up by a Medicaid or SSI applicant or recipient for their own funeral must be irrevocable. You cannot get that money back, any money left after the funeral goes to the local social services district, and the agreement’s value is not counted as a resource. You may still change your choice of funeral home at any time.

Irrevocable plans are the right tool for some families and a trap for others. If Medicaid planning is involved, this is the point where talking to an elder law attorney or your state Medicaid office is genuinely worth it.

Your Funeral Rule rights still apply

The federal Funeral Rule covers preneed sales as well as at-need ones, according to the FTC’s compliance guide for funeral providers. That means you are entitled to the General Price List and an itemized statement before you sign. Compare the plan’s total against the funeral home’s own price list; our line-by-line funeral cost breakdown and guide to the FTC Funeral Rule explain what should be on each.

Questions to ask before you sign

These build on the FTC’s own list:

Am I paying only for merchandise, such as a casket and vault, or for services as well?
What happens to my money? Is it in a trust or an insurance policy, and what share is deposited?
Who keeps the interest or earnings on money in a trust?
Am I protected if the firm goes out of business or is sold?
Can I cancel and get a full refund? If not, exactly how much would I get back?
What happens if I move or die away from home? Is the plan transferable, and at what cost?
Which prices are guaranteed, and which are estimates?
Is the contract revocable or irrevocable, and does that matter for SSI or Medicaid?
Is the seller licensed or permitted by the state? What is the permit number?

Alternatives worth comparing

A prepaid contract is not the only way to plan. Some people keep money in their own savings account set aside for the funeral, sometimes as a payable-on-death account naming the person who will arrange it; our guide to closing a deceased person’s bank accounts explains how those pass outside probate. Others rely on a life insurance policy with a named beneficiary; see how to claim life insurance after a death. These keep the money under your control, but they do not lock in prices.

If you already have a plan and something has gone wrong, contact your state regulator. In Texas, the Department of Banking handles prepaid funeral contract complaints at 1-877-276-5554, and its website lets you check whether a seller holds a valid permit. In other states the regulator may be a different agency, such as a funeral licensing board or an insurance department. Before paying anything, look up which agency regulates preneed sales in your state and confirm that the seller is licensed.

Sources

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