"Consumer advocates have been urging states to enact stricter regulations of prepaid plans for years," says Sally Hurme, a senior project manager who specializes in consumer education at AARP, the Washington-based advocacy group. "This is a step in the right direction."

Long thought of as products for lower-income families, prepaid funerals are increasingly being sold to consumers across all income levels, even the wealthy.

Some view prepaid plans as an inflation hedge that allows them to lock in today's prices about $10,000 on average for an expense that in recent years has risen faster than the consumer price index. Others take the step simply to spare survivors the burden of arranging and paying for a funeral. Consumer advocates say these plans are most appropriate for people who wish to spend down assets in order to qualify for Medicaid coverage.

About one in four Americans age 50-plus some 20 million people have paid in advance for a funeral service, according to AARP. While national figures on the size of those payments are scarce, in Texas alone consumers have contracts worth $3 billion.

Prepaid funeral plans come in two basic varieties. With a so-called guaranteed plan, a funeral home promises that if you pay today's prices, it will provide the goods and services you purchased, no matter how much prices rise. "Non-guaranteed" plans offer no such protections. But if these accounts appreciate in value, heirs get to keep the gains. (You can prepay today's full cost or a portion of it, in one lump sum or over time.)

Even guaranteed plans don't always protect against unexpected bills, however. Many exempt such items as flowers and music. And changes, such as upgrades in caskets or a switch to another funeral home, can void the price guarantee.

People who invest in a prepaid funeral generally have two options: They can put their money into a trust run by a financial institution or statewide funeral directors association, or they can buy an insurance policy usually a whole-life contract.

In either case, getting out of a prepaid deal isn't easy. In many states, trust funds impose fees on refunds. In Texas, for example, consumers forfeit to the funeral director 10% of their prepayments, plus half of any earnings. In California, consumers can lose up to 10% of the prepayment.

The fees for cashing in an insurance contract can be even stiffer. But people who cancel policies are entitled to receive only the cash value  that is, the premiums paid, minus commissions and costs, such as administrative expenses.

Not only are prepaid funeral plans often stacked against consumers, but some operators engage in fraud. While petty scams have long plagued the industry, in recent years the sums have been growing, say regulators.

In 2008, National Prearranged Services Inc., a Missouri-based seller of prepaid funeral services, collapsed, leaving about $600 million in unfunded liabilities. In a complaint filed on Aug. 6 in the U.S. District Court for the Eastern District of Missouri, regulators in various states accused company officials of "systematically loot[ing] the cash for their personal enrichment" in part by replacing whole-life polices sold to cover funerals with less-expensive term-life coverage and pocketing the difference.

During October 2009, the U.S. Attorney's Office in the Eastern District of Missouri indicted former NPS president Randall Sutton and former office manager Sharon Nekol Province on nine felony counts, including mail fraud and money laundering. Burton Shostak of Shostak & Shostak LLC in St. Louis, an attorney for Mr. Sutton, says his client "will be totally vindicated." Joseph Green, an attorney for Ms. Province at Leritz Plunkert & Bruning PC in St. Louis, couldn't be reached for comment.

Such cases are prompting lawmakers to curb some of the most obvious abuses. Texas recently passed legislation that requires those selling prepaid contracts, as of June 1, to hand out a brochure approved by state regulators disclosing some of the potential pitfalls of these arrangements. In November, New Jersey started requiring cemeteries to deposit all of the prepayments they receive for burial services into a trust fund for safekeeping.

When it comes to fraud, consumer protections are spotty. To avoid peoblems, you can open a joint account with someone you trust or a "payable-on-death account" with a bank or brokerage firm, says Jeffrey Bloom, a partner at Margolis & Bloom LLP, a Boston law firm that specializes in elder law. If you want to be sure the money is used for a funeral you can set up a trust. Typically, says Mr. Bloom, such a trust would be relatively simple and would cost "a few hundred dollars."