Do you have specific plans for your funeral? According to the Federal Trade Commission (FTC), a traditional funeral costs up to about $7,000 these days. In this light, it is not a bad idea to take a few moments to think about what kind of arrangements you would like at the time of your passing and to make sure they are adequately paid for. No one wants to think too much about what happens after their death but avoiding any headaches or uncertainties for your family and loved ones can also provide you with a certain peace of mind. Familiarizing yourself with different types of funeral insurance will provide you with the first steps in that direction.
What is Pre-Need Insurance?
Pre-Need Insurance is a type of funeral insurance that is bought from a funeral home or funeral provider directly. In this case, the funeral home director is a licensed agent who will also receive a commission just like a normal insurance agent. The funeral home will provide a list for goods and services according to the FTC’s “Funeral Rule” that the policy owner can choose from. A “locked-in” price for those goods and services will be agreed upon ahead of time.
The policy can be paid with one single payment or in increments over a period of time, depending on the policy agreement. Pre-need policies are underwritten by one single company only, making it more difficult to price shop. You will have to either accept the offered policy rate, or decline and go look elsewhere.
The beneficiary of the policy will usually be the funeral home director of the facility specified in the contract. However, certain states don’t allow for the funeral director to be the direct beneficiary. In that case a trusted loved one must be designated, who will then be charged to carry out the funeral arrangements.
Pre-planning avoids putting the burden of the funeral’s organization on your family and loved ones. The policy holder can specify exactly what he or she wants, avoiding any confusion or arguments later on.
Advantages of Pre-Need Insurance
Pre-Need Insurance provides a price-guarantee. Only the pre-arranged amount has to be paid regardless if prices for the services and items purchased increased since the purchase of the policy. This avoids bad surprises when the time comes. Another advantage is that the policy owner can select exactly what kind of services he wants. Precise planning of the funeral is made much easier this way.
Disadvantages of Pre-Need Insurance
Pre-Need Insurance designates a specific funeral home and this one only. There is usually no flexibility with this. There are often hefty fees for terminating the policy or transferring it to a different funeral home. It is very difficult to make any changes to the plan once it’s signed on the dotted line.
Since you buy a policy from one provider only, it is sometimes difficult to compare prices and make an informed decision on which funeral home provides the policy that’s best suited to your needs.
What is Final Expense Insurance?
Final Expense Insurance covers the estimated cost of the funeral at the time of death and is provided by insurance companies instead of the funeral provider. Final expense insurance is usually written with much lower face value than traditional life insurance, making it much more affordable. Life insurance is known to range up to $1,000,000 while final expense insurance can frequently be purchased for $5,000 to $50,000, making it an excellent and economical alternative.
There are two types of final expense insurance:
Term Life – The coverage only extends over a certain period of time or until a certain age.
Whole Life – You will be covered for the rest of your life from the time you sign the policy.
There are also “simplified issue” policies for which health questions will be asked, which might increase the premium over time. “Guaranteed issue” policies, on the other hand, are issued to anyone applying.
Advantages of Final Expense Insurance
Final Expense Insurance is very flexible. You can choose whatever beneficiary you like and change it during your lifetime. You also don’t have to choose specific services the money must go to beforehand. Additionally, the premiums don’t change and the insurance company can’t cancel the policy, providing peace of mind once the policy is purchased.
Disadvantages of Final Expense Insurance
Funeral costs fluctuate. Money that is deemed sufficient to cover the cost of a funeral today might not be enough tomorrow. Final Expense Insurance doesn’t account for that and any additional cost for a funeral that can’t be covered by the policy will have to be paid by family or friends.
Taking some time to ask yourself the question what type of funeral you would like goes a long way to making sure you can make the correct arrangements for it while you’re alive. Being honest with yourself about your lifestyle or health risks can also help you choose a policy that makes the most sense economically. A pre-need policy binding you to the town you live in right now might not be the right option if you plan to retire in a different country. Similarly, if you don’t have life insurance or are short on savings, final expense insurance can bring a nasty surprise.
In any case, there are a few general things to keep in mind before choosing a policy. Make sure to find out your state’s law when it comes to pre-need and final expense insurance. For example, many states have “free look” laws for pre-need insurance. Make sure to discuss your plans with your family and lawyer so as to avoid any conflict with your general long-term financial planning. And make sure to stay informed concerning the status of your policy.
After all, making sure arrangements are made for when you pass is not only benefitting you, it’s benefitting your family and loved ones as well.
Updated: March 28, 2014