Funeral insurance is a form of life insurance specifically designed to provide your family with the funds to pay for your funeral. Some funeral insurance policies also provide funds to cover other “final expenses” such as medical bills, legal expenses, credit card charges, and any other bills that remain unpaid at time of death. These policies are commonly referred to as final expense insurance, burial insurance, and preneed funeral insurance (collectively “funeral insurance”), but there are important differences to consider when making a purchase decision.
Know what you’re buying! Regardless of whether the policy is marketed as funeral insurance, final expense insurance, burial insurance or preneed insurance, be sure to find out if it is a whole life policy or a term life policy. There are important differences. Term life premiums will be lower but the policy will terminate at a specific age (e.g. 75 or 80 years old) or after a specific period of time 10, 15 or 20 years. If the policy terminates during your lifetime there will be no payout of the death benefit. Whereas, a permanent whole life policy can be kept in force throughout your lifetime and your beneficiary will receive the payout upon your death.
Funeral insurance policies are available from various insurance companies and can be purchased through funeral service providers and their agents, as well as from insurance agents. The terms of these policies not only vary from company to company but also from state to state due to differing state regulations for funeral insurance.
The most important benefit of funeral insurance is financial security for your family. According to the 2013 General Price List Survey by the National Funeral Directors Association, the average cost of a traditional funeral is over $8,343, including a burial vault but not including cemetery costs. A traditional funeral can easily cost $10,000 or more when you add in cemetery charges. Covering funeral costs is a heavy financial burden for most people, especially if it comes unexpectedly and at a stressful time. Having a funeral insurance policy in place protects your family against this financial hardship and avoids the added stress of paying your final expenses while dealing with their loss.
Life insurance is an excellent means of providing financial security for your survivors. If your family depends on your income, life insurance can partially replace the income lost due to your death. Also, life insurance is a way to provide an inheritance for your heirs even if you do not have assets to leave them. To meet these objectives, most life insurance policies have a minimum purchase of $25,000 or more, which is more than needed for most funerals.
Since funeral costs are due at the time of the service, funeral insurance policies often pay claims within a few days. This provides your family with immediate access to cash when they need it most and relieves them of the worry of paying for your funeral.
The lower policy amounts of funeral insurance make it a cost-effective alternative to traditional life insurance plans. Funeral insurance also makes sense as a supplemental coverage if you do not want the proceeds of your life insurance policy to be depleted by your final expenses.
There are basically two types of funeral insurance—“preneed funeral insurance” and “final expense insurance.”
Policies advertised as “burial insurance” most likely are term life or final expense insurance, but they may be another variation of preneed funeral insurance. For purposes of this discussion, we’ll consider burial insurance to be the same as final expense insurance.
The best choice for you depends on your particular circumstances and objectives. Here’s how both options work.
Final expense insurance offers greater flexibility than preneed funeral insurance (as described below) because it is not linked to a preneed contract or a specific funeral home. You or your survivors can choose and change funeral service providers at any time. Also final expense policies can cover other anticipated final costs in addition to your funeral costs. Generally, final expense policies have lower premium payments than comparable preneed funeral insurance policies, and it’s easier to meet the health requirements for a final expense policy.
As mentioned earlier, final expense policies may be whole life insurance or term life insurance. In either case, you typically need to continue making premium payments to keep a final expense policy in force. The whole life versions of final expense insurance may be kept in force until death whereas term life insurance expires after a specific period of time. Since a final expense policy is not tied to a preneed contract, there is no price guarantee. A final expense policy pays the death benefit to your designated beneficiary, who will use it to pay the funeral costs prevailing at the time of your funeral and any other final expenses. You should purchase sufficient final expense insurance to cover future price inflation.
Burial insurance is a bit of a misnomer because funerals do not necessarily involve a burial. Burial insurance policies can cover any type of final arrangements, including cremation and donating one’s body to science. Nonetheless, it is apparently a familiar term because various policies are advertised as burial insurance. An Internet review of burial insurance offerings reveals a variety of policies, but most appear to be term life insurance policies similar to those marketed as final expense insurance.
Preneed funeral insurance is linked to a funeral home, cremation service provider, or other funeral service provider of your choosing and is a popular alternative to a funeral trust. The first step is to choose a provider and enter into a preneed contract for future delivery of your funeral goods and services. A preneed funeral insurance policy will then be issued for the same amount as your preneed contract. Preneed funeral insurance is whole life insurance that accumulates cash value as premiums are paid and has an investment component with a built-in growth rate. Payment plans may be a single lump sum payment or installment plans over 1, 3, 5, 7, or 10 years. Once you have paid the premiums in full, the policy remains in force throughout your life. Preneed funeral insurance is designed to specifically cover your funeral costs, not other final expenses.
Preneed funeral insurance premiums are paid to the insurance company, which acts as a third party between you and the funeral provider. This protects you from losing your investment should a funeral provider go out of business at any time prior to your death. Another protection is that preneed policies have provisions for changing the funeral service provider linked to your policy. Making such a change does involve filing certain paperwork.
Preneed funeral insurance has advantages in comparison to funeral trusts. Whereas interest income on trust accounts is taxable, the growth in death benefits on a funeral insurance policy is not subject to income tax. Depending on your state laws, preneed funeral insurance may be excluded from your personal assets, thereby lowering your net worth and helping you qualify for assistance from social service programs, such as Medicaid.
Depending on your funeral service provider, your preneed funeral insurance policy may be used to lock in current prices as protection against inflation. To guarantee the price of your preneed contract, your preneed insurance policy will be assigned to your funeral service provider. The eventual payout of your policy will go directly to the funeral service provider, who will accept it as payment in full of your preneed contract, regardless of prices at that time.
If your preneed contract is not guaranteed, your beneficiary will receive the payout that may or may not be sufficient to cover the prevailing prices of your funeral goods and services at that time. A price guarantee is good to have when funeral prices rise at a rate greater than the policy growth rate. However, not all funeral service providers are willing to accept this risk and give you a guarantee.
If you wish to keep your recurring payments as low as possible and maintain flexibility in your choice of funeral service providers, a final expense policy (or burial insurance policy) may be best for you. However, preneed funeral insurance may be the way to go if you are certain about your selection of a funeral service provider, can afford higher premium payments, and wish to secure a price guarantee.
Finally, when evaluating a policy be sure to find out if it is whole life or term life coverage. Term life policies will have lower rates but you could out-live a term policy whereas a whole life policy may be kept in force throughout your life.