Transferring ownership of a life insurance policy to a funeral home locks in money for your burial and, if the assignment is irrevocable, can move the policy out of your countable assets for Medicaid. The trade-off is permanent: you give up the right to change beneficiaries, borrow against cash value, or cancel the policy. Before you sign, you need to understand the difference between naming a funeral home as beneficiary and handing over ownership, whether the assignment should be revocable or irrevocable, and how the transfer interacts with taxes, Medicaid, and the rest of your estate plan.
Naming a Funeral Home as Beneficiary Is Not the Same Thing
These two options get confused constantly, and the difference matters.
Naming a funeral home as beneficiary tells the insurer to send the death benefit to that funeral home instead of a family member. You keep full ownership. You can change the beneficiary later, borrow against cash value, or cancel the policy entirely. The funeral home has no rights until you die.
Transferring ownership is a different step. The funeral home becomes the legal owner and can change beneficiaries, surrender the policy for cash, or make other decisions about it. You lose the right to alter anything. In most prepaid funeral arrangements, the funeral home becomes both owner and beneficiary.
Revocable vs. Irrevocable Assignment
A revocable assignment lets you reclaim ownership if circumstances change. You move, you want a different funeral home, or you simply change your mind. Because you retain the ability to take the policy back, Medicaid still counts the cash value as your asset.
An irrevocable assignment is permanent. You cannot undo it without the funeral home’s cooperation, and even then most arrangements only allow you to redirect the assignment to a different funeral home rather than take the policy back. The upside is that Medicaid generally treats the policy as no longer yours, which can help you qualify for benefits.
If Medicaid planning is part of your picture, the choice is essentially forced: only an irrevocable assignment does the job. If it isn’t, a revocable assignment preserves more flexibility.
How the Transfer Works
The paperwork isn’t complicated, but insurers reject sloppy submissions routinely, and the delays can stretch into months.
Assignment and Beneficiary Forms
Get an assignment-of-ownership form from your insurance company. This is the core document that legally transfers the policy. If you also want the funeral home named as beneficiary, which is typical, you need a separate change-of-beneficiary form. One changes who controls the policy; the other changes who gets paid.
Policy Verification
Before processing the transfer, the insurer will confirm the policy is active and in good standing. Outstanding loans against the cash value or existing liens on the policy can complicate or block the transfer. Request a recent policy statement first so you know what you’re working with, and review the policy terms for any transfer fees or surrender penalties that would reduce the value.
Notarization
Most insurers require the assignment form to be notarized. A notary public verifies your identity and confirms you’re signing voluntarily, which matters because you’re permanently giving up a financial asset. Some states also require witnesses in addition to notarization.
What the FTC Funeral Rule Requires Before You Sign
Federal law gives you specific rights the funeral home cannot waive. The FTC’s Funeral Rule requires every funeral provider to hand you an itemized General Price List at the start of any in-person discussion about services, prices, or the type of funeral you want, and you get to keep that list.1Federal Trade Commission. Complying with the Funeral Rule This applies to pre-need arrangements, which is exactly what a policy assignment funds.
Once you’ve selected goods and services, the funeral home must give you a completed Statement of Funeral Goods and Services Selected. This itemized statement lists every item you chose, its price, all cash advance items the funeral home pays on your behalf (like cemetery fees), and the total cost. The funeral home cannot lump categories together or hide costs inside package pricing without also listing each item separately.1Federal Trade Commission. Complying with the Funeral Rule
Get both documents before you sign the assignment. Comparing the itemized statement against your policy’s death benefit tells you immediately whether the policy will cover the full cost or leave a gap your family will have to fill.
Guaranteed vs. Non-Guaranteed Pricing
A guaranteed-price contract locks in today’s prices. If you assign a $15,000 policy to cover a $12,000 funeral, the funeral home absorbs any price increases between now and when you die. Your family owes nothing extra.
A non-guaranteed contract lets the funeral home charge current prices at the time of death. If costs have risen, your family may have to pay the difference out of pocket or downgrade the selections. Ask explicitly whether prices are guaranteed and get the answer in writing as part of the agreement.
Medicaid Planning and the Spend-Down
For many people, Medicaid eligibility is the real reason to consider this move. Long-term care Medicaid requires countable assets below roughly $2,000 in most states. A life insurance policy with cash value counts against that limit. An irrevocable assignment to a funeral home removes the policy from your asset column, and unlike most asset transfers, funding an irrevocable funeral arrangement generally does not trigger a penalty under Medicaid’s five-year look-back period.
The key word is irrevocable. A revocable assignment leaves you with the legal ability to reclaim the policy, so Medicaid still counts it. An irrevocable assignment means you’ve permanently given up ownership, and Medicaid treats it accordingly.
Most states cap the amount that can be placed in an irrevocable funeral trust or contract and still be exempt from Medicaid asset calculations. The limits vary widely, roughly $5,000 to $15,000 per person depending on the state. Check your state’s threshold before committing. If the policy’s cash value exceeds the cap, the excess may still count as a Medicaid asset.
Tax Consequences
Three separate tax issues can arise, and they interact in ways that aren’t obvious.
The Transfer-for-Value Rule
Life insurance death benefits are normally income-tax-free to the recipient.2Internal Revenue Service. Life Insurance and Disability Insurance Proceeds But when a policy is transferred for valuable consideration, meaning someone gives something of value in exchange, the tax-free treatment shrinks. The recipient can only exclude the amount they actually paid for the policy plus any premiums they paid afterward. Everything above that is taxable income.3Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits
A prepaid funeral contract is arguably a transfer for valuable consideration: you hand over a policy, and in return the funeral home commits to providing services. Statutory exceptions to the rule cover transfers to the insured, to a business partner of the insured, or to a corporation where the insured is a shareholder. A funeral home doesn’t fit any of those.3Office of the Law Revision Counsel. 26 USC 101 – Certain Death Benefits This issue mainly affects the funeral home, which receives the proceeds and could owe tax on the excess, but it can shape how the arrangement is structured and whether the funeral home will agree to it. A tax professional can tell you whether your specific arrangement triggers the rule.
The Three-Year Estate Inclusion Rule
If you transfer ownership of a life insurance policy and die within three years, the full death benefit gets pulled back into your gross estate for estate tax purposes as if you’d never transferred it.4Office of the Law Revision Counsel. 26 USC 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedents Death For 2026, the federal estate tax exemption is $15,000,000 per person, so this rule only creates a real tax bill for very large estates.5Internal Revenue Service. Estate Tax But if your estate is anywhere near that threshold, the timing of the transfer matters.
Gift Tax
The IRS treats a policy transfer as a gift. If the policy’s value exceeds the annual gift tax exclusion, which is $19,000 per recipient for 2026, you may need to file a gift tax return on Form 709.6Internal Revenue Service. Whats New – Estate and Gift Tax Filing the return doesn’t necessarily mean you owe gift tax; the excess typically counts against your lifetime exemption of $15,000,000. The policy’s value for gift tax purposes is generally its interpolated terminal reserve, roughly its cash surrender value, not the face amount, so a $100,000 term policy with no cash value might have a gift-tax value close to zero.7Internal Revenue Service. Instructions for Form 709
Where Excess Proceeds Go
If the death benefit exceeds the cost of the funeral, the surplus doesn’t disappear into the funeral home’s pocket. The typical arrangement requires the funeral home to return excess proceeds to your named beneficiary or estate. Some states go further, requiring that any amount above the retail price of the goods and services actually provided must go to beneficiaries or the insured’s estate.
The specifics depend on your contract and state law. Ask the funeral home directly what happens to leftover money and get the answer written into the agreement. If the contract is silent on excess proceeds, resolve that before you assign the policy.
If You Move or the Funeral Home Closes
People move. Funeral homes go out of business. Both create problems after an assignment.
If you relocate or want to switch funeral homes, an irrevocable assignment typically lets you redirect it to another funeral home, but you cannot take the policy back yourself. The new funeral home must agree to accept the assignment, and the original funeral home must cooperate with the transfer. The process usually involves new paperwork with the insurer and a new prepaid contract with the replacement provider.
If the funeral home goes out of business, your protection depends on state law. Most states require funeral homes to hold prepaid contract funds in trust or escrow accounts, separate from operating funds, so the money should survive a bankruptcy. Some states require 100% of prepaid funds to be held in trust; others allow the funeral home to retain a percentage as commission. Ask where your funds will be held and verify independently with your state’s funeral board or consumer protection office.
Ripple Effects on Your Estate Plan
Removing a policy from your estate creates consequences beyond funeral costs.
Life insurance is a common source of liquidity. Families use it to cover estate taxes, pay off debts, or provide immediate cash to heirs while other assets work through probate. Assigning the policy to a funeral home eliminates that cushion. If your estate plan assumed those proceeds would be available, the assignment breaks the plan.
Policies also act as equalizers. If you’re leaving a house to one child and a business to another, a life insurance payout to a third child can keep things roughly fair. Redirecting that payout to a funeral home creates an imbalance you’ll need to address through your will, a separate policy, or a redistribution of other assets.
Any time you transfer a policy, review your will, trust documents, and beneficiary designations on other accounts so the remaining plan still works without the policy you’ve given away.
Can You Reverse the Transfer
Whether you can undo the transfer depends on which type of assignment you made.
A revocable assignment can be reversed. You submit a request to the insurance company, and if the funeral home cooperates, ownership returns to you. The process mirrors the original transfer: assignment forms, notarization, and insurer approval.
An irrevocable assignment is designed to be permanent, and that’s the whole point for Medicaid purposes. You generally cannot reclaim the policy. In most arrangements, the only available change is redirecting the assignment to a different funeral home, and even that requires the current funeral home’s cooperation and a formal re-assignment through the insurer.
If a funeral home agrees to release the policy back to you, which it has no obligation to do, the reversal itself may create new tax and Medicaid consequences. If you received Medicaid benefits based on the irrevocable assignment, reclaiming the policy could trigger a reassessment of eligibility. Get legal advice before trying to unwind an irrevocable transfer.