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Reasons for Prefunding
Here are several reasons why some people choose to prefund their funeral or the funeral of a loved one.
1. To guarantee the cost of the funeral
It is unusual for a consumer to willingly purchase a product or service will in advance of its use or need. However, preplanning and prefunding a funeral can be more cost-effective in the long run. Once all the products and services selected have been paid in full, the funeral home assumes the responsibility for all price increases over the period in which the prearranged contract remains in effect. In other words, the cost of the funeral is guaranteed regardless of how much the prices of the goods and services selected rise. This may also include out-of-pocket expenses such as the purchase of cemetery plots, flowers, newspaper notices, and etcetera.
Depending on the duration of the contract, this can equate to considerable savings for the purchaser. For example, assuming a modest inflationary factor of two percent annually, over a 10-year period, the purchaser will realize a savings of over $ 1,000 for a $ 5,000 funeral.
2. To design a suitable payment scheme
There are two basic types of prepayment options from which to choose. They are cash funded or insurance funded options. When paying by cash the purchaser may choose to pay singly lump sum payment, make regular installments over a fixed period or a combination of both. As noted earlier, when paid in full the price of the funeral is guaranteed. Some funeral homes will also guarantee the price is a significant portion (i.e. 40 percent or 50 percent) of the funeral's cost is paid upfront, with the reasonable period not exceeding say 12 to 18 months.
Similar options are available with funeral insurance. A purchaser may pay for coverage with a single lump sum payment or choose a 3, 5, or 10-year payment scheme. Others may opt for term insurance and pay a modest monthly premium for the full term of the policy. Certain funeral insurance products have an annual growth component wherein the face value of the policy will increase yearly usually by a factor of 3 or 4 percent. These types of growth policies are accepted by most funeral homes and it assigned by the purchaser to the funeral home, the funeral home will guarantee the cost of the funeral against policy.
Funeral homes have numerous prepayment options available and will assist you in designing a payment scheme that will best suit your financial circumstances.
3. To relieve the survivors of any financial burden or hardship
When a sudden or unexpected death occurs, survivors are often faced with significant financial hardships. Unless monies have been put aside or insurance purchased, funeral expenses on top of the regular monthly bills are an added burden for someone on a fixed income or a parent raising a young family. Prefunding one's funeral helps relieve family members of the added financial burden associated with the loss of a loved one.
4. To meet financial obligations prior to entering or while residing in a resident care facility
Before entering a resident care facility, most people choose to put their financial affairs in order. In many cases this includes the preplanning and prepayment of their funeral expenses. If surplus funds are not available prior to entering the facility, a resident is permitted to accumulate funds in a resident trust up to a fixed limit. Once the limit is exceeded some residents choose to prefund their funeral using the additional monies from their trust.
5. To take advantage of Tax Benefits
In 1995 the federal government amended the Income Tax Act to implement measures relating to prepaid funeral arrangements. The Act sets out rules which allow for a tax-free build-up of income earned in contributions made under, what is referred to in the legislation as, an "eligible funeral arrangements."
An eligible funeral arrangements (EFA) is defined as an arrangement established for the purpose of prefunding expenses related to funeral, burial, cremation or cemetery arrangements in Canada for one or more individuals by any person licensed or authorized by provincial laws to provide these services.
In Accordance with the Act an individual may contribute up to $ 15,000 over their lifetime to an EFA. Any prepaid funeral arrangement that exceeds the
$ 15,000 limit will be ineligible for beneficial treatment under the Income Tax Act.
An individual can also have more than one EFA with more than one service provider. Therefore, an individual could enter into separate agreements for funeral arrangements and for cemetery arrangements and have each qualify as an EFA. In this way the $ 15,000 contribution limit can be increased to
$ 30,000.
Although the purchaser of an EFA will not receive tax deduction for amounts contributed to the EFA, the interest or income accrued in the EFA can grow on a tax-free basis.
If the EFA remains in force until the death of the purchaser, no tax will be levied on the monies paid out of the EFA as long as the funds are used for funeral or cemetery services. However, in the case where an EFA is cashed in or where surplus funds remain after the provision of the funeral or cemetery services income realized is taxable.
As income earned outside an EFA is taxable, funds inside a tax-free EFA will accumulate much faster. To illustrate, if one was to establish an EFA at age 65, contributed say $5,000 in the plan and earned 5 percent on the money for another 20 years, the amount available at the time of death at age 85 would be just over $ 13,000. In comparison, if an individual invested $ 5,000 in a GIC outside and EFA at the same rate and over the same time frame, the amount available at age 85, assuming a marginal tax rate of 50 percent, would be
$ 9,000. The purchaser of the EFA would realize a tax savings of approximately $ 4,000 (i.e. $ 13,000 - $ 9,000).
Whether the additional income was used to enhance one's funeral or a portion paid to the estate (where the accumulated income would be taxed) there are tax advantages to prepaying one's funeral arrangements.
6. To place limits on the cost of one's funeral
If an individual was concerned that family members would overspend on his or her funeral services or wanted to limit the cost of the funeral, preplanning and prefunding the funeral would be the best approach. Most next-of-kin or executors are extremely reluctant to alter the final wishes of a loved one.
7. To feel secure in knowing payment has been made in full
Many people, especially the elderly who live alone or are living on a fixed income are greatly relieved when they have prepaid their funeral services in full. They feel secure in knowing family members will not be burdened with this extra expense and, more importantly, at the time of their death they will be looked after with dignity and respect.
Commentary:
Thousands of Canadians choose to prefund their funeral and cemetery services each year. Regardless of your financial circumstances there are many cash and insurance funded products available to suit your needs.
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