You have two basic options for covering your funeral expenses, including the costs of burial or cremation. You can:
If you don't do either of these things, your survivors will be responsible for covering the costs of your funeral arrangements. If they can't pay, a local government program will likely cover the cost of an "indigent" burial or cremation.
The most recent statistics from the National Funeral Directors Association put the average cost of a funeral with burial at about $7,000. Cremation costs less—a cremation and funeral averages about $5,000. These figures don't cover many common expenses such as cemetery costs, markers, flowers, or obituaries. For many people, after a house and a car, funeral goods and services are the most expensive thing they'll ever buy. It's wise to make a plan to pay for these costs.
If you want to pay for your funeral arrangements ahead of time, make sure you're dealing with a reputable funeral establishment and clearly document any plans you make, so your survivors can easily carry them out. Though the law requires providers of funeral goods and services to carefully manage your funds, abuses do happen. What's more, if a funeral establishment goes out of business, your careful planning may be lost.
The safest and easiest way to cover the costs of your final arrangements is to estimate costs and tuck away the funds in an easily accessible, interest-earning bank account. You can designate a beneficiary who can claim the funds immediately after your death. Make sure the beneficiary understands what the money is for, however, and that you trust him or her completely because the beneficiary is under no legal obligation to use the funds for your final arrangements.
For more information about setting up an account to cover the costs of your final arrangements, see Payable-on-Death (POD) Accounts: The Basics.
Leaving a written plan for your funeral arrangements (including how to pay for it) is a significant gift to the people you leave behind. Your survivors (or your executor, if you named one) must follow the plan that you leave, and they will almost certainly be grateful for your forethought in the difficult days after your death.
It's best to leave your wishes in a document separate from your will. You can leave instructions about burial or cremation, a memorial service, flowers, music, and of course a plan for how to pay for these final arrangements. You can even write your own obituary. Just make sure to leave your instructions in a place where they will be easily found in the hours and days after your death. If practical, let key people in your life know where to find them.
Read more about Planning Your Funeral or Memorial Service.
If you don't make a plan, your survivors (or your executor) will have to make your final arrangements and figure out how to pay for them.
If you haven't prepaid or set aside funds, the costs of your final arrangements will come out of your estate. Paying these costs will almost certainly reduce the amount of money or property that your beneficiaries receive. For example, if your final arrangements cost $10,000 and your executor pays those bills out of your savings account, the person who receives the balance of your savings account will get $10,000 less than if you had prepaid for your funeral. Similarly, your executor could sell your house and pay for your final arrangements from the proceeds, but this will reduce the value of the gift to the person named to receive the proceeds of the sale of your house.
Your executor must follow your state's rules about to pay for your final arrangements, but in practice, it is often a judgment call to figure out how to fairly take these costs out of an estate.
If your estate does not have enough money to cover the costs of your final arrangements, your executor will look to your relatives to pay these bills. If your relatives cannot decide how to pay for them, a probate judge may decide for them. Your closest relatives by blood or marriage (spouse, parents, children, siblings) are the most likely to be on the hook.
If you have no relatives to pay, if your relatives cannot pay, or they refuse to pay, a government program (usually through the county or state) will likely take care of your final arrangements. In this case, you may receive an "indigent" burial or cremation which will provide very simple, economical arrangements. These government programs vary widely by location. To find out about programs in your area, do an internet search for "burial assistance programs" and the names of your county and state.