Burial insurance, also called funeral insurance or final-expense insurance, is a type of permanent life insurance designed to cover funeral costs and other end-of-life expenses. But are the benefits worth the cost, and is it the best choice for you and your family?
In this article, we’ll explain the benefits and disadvantages of burial insurance. Plus, discover burial insurance alternatives and learn what type of policy best fits your needs.
WHY BUY BURIAL INSURANCE?
According to a 2020 report from life insurance group LIMRA, over 80% of people who own life insurance list covering end-of-life expenses as a primary reason for purchasing a policy. This makes sense when you consider the average cost of a funeral, per a recent article from Policygenius, is $10,000, and does not always include a burial plot or headstone. Factor in other end-of-life expenses, and the actual cost goes up—typically to over $20,000.
These costs often become the burden of a surviving spouse or adult children, especially when there aren’t other insurance policies or savings to cover them. Further, Social Security only pays out a lump sum of $255 toward funeral costs, and only if certain qualifications are met.
For individuals who are concerned about protecting their loved ones financially and providing sufficient funds to cover end-of-life expenses, burial insurance might seem like the perfect solution. Here are the pros and cons:
BURIAL INSURANCE PROS & CONS
- You typically don’t need a medical exam to qualify for a policy.
- Because policies are small, they can be more affordable than traditional whole life policies (although you get significantly more benefits per dollar with non-burial whole life insurance, especially if you’re healthy).
- Burial insurance is permanent insurance, you can’t outlive it. As long as your premiums are paid, your beneficiaries will receive a payout.
- Burial insurance avoids probate; your beneficiaries will be paid quickly from your policy when you pass away.
- Because policies are small, they don’t offer sufficient coverage for income replacement or large debts like mortgages.
- Cash value is minimal and not enough to use for investment opportunities, kids’ education, or retirement funds.
- The cost of burial insurance compared to term life insurance is usually high. You can get about 10x the coverage with term life insurance for the same monthly premium (although you run the risk of outliving your term policy).
- Some policies have graded death benefits, where you only receive a small percentage of your death benefit or a return of premiums paid if you pass away shortly after purchasing a policy.
- Although burial insurance payouts are intended to cover your funeral costs, there is no guarantee your beneficiary will use the money for that purpose.
BURIAL INSURANCE TYPES & ALTERNATIVES
There are several different types of burial insurance policies you can choose from, including simplified issue whole or universal life insurance, and guaranteed issue whole life insurance. Or, you can opt for a pre-need insurance plan or payable-on-death (POD) account. Finally, trusts can be established, with or without life insurance, to help cover end-of-life expenses.
Here’s how each option works:
Simplified Issue Whole Life Insurance
Simplified issue life whole insurance doesn’t require a medical exam but you may have to fill out a health questionnaire. Based on your answers, you may or may not qualify for burial insurance, and rates are based on age and gender. The maximum death benefit is usually less than $100,000.
Simplified Issue Universal Life Insurance
Simplified issue universal life insurance is similar to simplified issue whole life insurance, but the maximum death benefit may be higher—up to $250,000. You don’t need a medical exam but you will likely have to fill out a health questionnaire to qualify.
Guaranteed Issue Whole Life Insurance
Guaranteed issue whole life insurance is as straigh-forward as it sounds: It’s guaranteed to provide coverage. Like simplified issue policies, guaranteed issue policy rates are based on age and gender, but you don’t have to take a medical exam or fill out a health questionnaire. The maximum death benefit is usually $25,000 or less and often there is a 2-3 year waiting period where the death benefit is graded (you only receive a percentage of the payout or return of premiums if you pass away).
Pre-need insurance policies function like typical burial insurance, but instead of the beneficiary being a spouse or child, the death benefit is paid out to your chosen funeral home. Policies can be purchased through a life insurance company or through certain licensed funeral homes/funeral directors.
Pre-need policy amounts are based on your funeral plans—you get to choose all aspects of your funeral, like your casket, music, flowers, etc.—and lock in prices with your funeral home to cover that amount.
Pre-need policies can help take stress and decision making off your loved ones and ensure your funeral happens the way you want it to, but can be difficult to change once you’ve purchased the policy. This type of insurance is best purchased toward the end of your life when you’re fairly certain your plans and finances won’t change, or you know you won’t be relocating to another state, as pre-need policies aren’t always transferrable.
Payable-On-Death (POD) Account
A payable-on-death account, also called a Totten Trust, isn’t life insurance, but it does avoid probate like an insurance policy, putting money in the hands of your beneficiary/beneficiaries faster. It allows you to add or withdraw money as needed while you’re living to cover funeral and end-of-life expenses, similar to a savings account. The main difference between the two is that a savings account is subject to probate when you pass away, which increases the amount of time it takes for your loved ones to access funds.
There are various types of trusts you can utilize to pay for funeral expenses. You’ll appoint a trustee to withdraw from the trust after you pass away. Depending on the type of trust and documents held, you can outline your funeral wishes and the trustee is legally obligated to use funds per your requirements. Often, life insurance policies are purchased within a trust, which can help avoid estate and gift taxes.
CHOOSING A BENEFICIARY
Whether you opt for traditional types of burial insurance, a POD account, or a trust, you’ll need to select a beneficiary to receive the death benefit or payout and carry out your final wishes. Within some trusts, funeral plans are already outlined, but other types of end-of-life accounts will require some instruction left with the beneficiary.
Make sure your loved ones know your final wishes and are aware of any accounts they may be beneficiaries to. Discuss where to find important documents pertaining to funeral plans, insurance policies, and bank accounts. Make sure necessary individuals know about any safety deposit boxes and have access to them, as well as codes to home safes, as needed. A power of attorney or trustee should have all the tools to manage your finances and should know how you’d like wealth distributed.
The amount of burial insurance coverage you need will vary. If your only goal is to provide funds for funeral costs, research the average cost of funeral services in your area. They can fluctuate significantly from state to state. Also consider end-of-life expenses, like medical bills or outstanding loans that may fall to your loved ones. Factor in the following expenses:
- Burial plot
- Coffin or cremation urn
- Funeral home costs
- Funeral service provider fees
- Floral arrangements
- Programs/printed materials
- Transportation (funeral home to cemetary)
- Charitable donations you’d like made in your name
- Medical bills
- Hospice care bills
- Outstanding mortgages
- Outstanding credit card debt
- Outstanding auto loans
- Outstanding personal loans
Burial insurance is usually purchased by seniors aged 50-85 who have little savings or other life insurance. If you fall into this category, particularly if you’re not in good health, a guaranteed issue whole life insurance policy, POD account, or pre-need insurance policy to cover funeral expenses may be your best options.
However, if you’re healthy or young, a whole life insurance policy structured for growth of cash value—also called a 770 Account—can provide a greater array of benefits and you’ll lock in a preferred rate for life. These types of policies can be purchased through a trust or by an individual and allow you to take advantage of significant tax benefits, including tax-free policy loans.
Because they earn a guaranteed rate of return, non-guaranteed dividends and are designed to grow cash value, whole life insurance is ideal for extra income in retirement, investment opportunities, business capital, and passing down generational wealth.
Another option is to buy a term life insurance policy with a conversion rider, which will allow you to access affordable coverage now and convert the policy to a whole life insurance policy years down the road. For families who find the cost of whole life insurance prohibitive short-term, term life with a conversion rider provides immediate coverage plus potential permanent coverage.
If you choose a whole life insurance policy structured for growth or certain term life insurance policies, you can also add a funeral or burial insurance rider to your policy. This rider will increase your death benefit paid to your beneficiary, specifically for funeral costs. If you’re already purchasing insurance, particularly if you’re young, adding a burial insurance rider to your policy at time of purchase can be a very cost-effective way to cover end-of-life expenses, compared to a stand-alone burial insurance policy.
PURCHASING A POLICY
When you’re ready to purchase a burial insurance policy or other type of life insurance, it’s important to work with an insurance agent or Wealth Strategist who has your goals and budget in mind. The Wealth Strategists at Paradigm Life work with the nation’s top-rated mutual insurance providers to find a policy that fits your needs, and can help you find sufficient coverage among carriers if health concerns are an issue.
Depending on the policy type, you may or may not need a medical exam. If one is required, Paradigm Life can facilitate scheduling and even schedule an in-home exam. We can also assist you in any other supplemental forms, including health questionnaires.
Often, people consider insurance for end-of-life expenses when they are writing up a will or estate plan, or designating power of attorney. Because insurance is just one piece of your financial portfolio, it can be beneficial to include your tax advisor or CPA, legal representation, or other financial planning experts in the decision-making process.
Keep in mind that burial insurance can be purchased for other people with whom you have insurable interest. This means anyone whose death would impact you financially. You may want to purchase burial insurance for your parents or in-laws if they’re uninsured, to help protect your own financial wellbeing. It’s also possible to purchase insurance for your children sufficient to cover funeral costs. These policies can often be converted into larger whole life insurance policies when your children grow up, locking in affordable coverage for them for life.
Paradigm Life has served thousands of clients in all 50 states and Canada. We’re experts in finding insurance policies that help you accomplish your financial goals, whether they be covering end-of-life expenses, growing and protecting wealth, finding long-term care and disability insurance, utilizing insurance for retirement income and generational wealth, or insuring loved ones. Consultations are always free and done virtually, online or over the phone. Schedule today and let us help you find the perfect coverage option for your family—your goals and our goals, and we’re with you every step of the way.
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