How to choose between final expense insurance, regular life insurance, pre-need insurance, or self-funded burials
Funeral preparations are not usually part of regular, day-to-day conversations among family members. We don’t gather around the dinner table to discuss the merits of cremation versus burial. We don’t call our grandparents to ask them if they like stainless steel coffins or if they prefer a nice Mahogany piece. That is, until an unfortunate situation presents itself and forces these conversations to be had.
As people get older, the realization that funerals and burials cost real money, that they can result in an additional burden for their loved ones, becomes an all-too significant issue that can’t just be ignored. According to statistics from the National Funeral Directors Association (NFDA), in 2017 the median cost of a funeral with viewing and burial was $7,360. This does not even consider possible expenses like vaults, headstones, obituaries, flowers, accumulated medical bills, catered gatherings, or other considerations. Realistically, costs can ascend to $10,000 or more.
Fortunately, there are ways to prepare for the eventuality of these expenses. There is a multitude of options for posthumous costs, a confusing hodgepodge of terms and policies and coverages. Really, how many types of insurance does one human being need? To make sense of it all, it is first necessary to understand the different types of ways funerals and burials can be paid beforehand or prepared for. Final expense policies, regular life insurance, pre-need insurance, or self-funded burials are all valid alternatives with their particular pros and cons. Let’s take a look at each to determine which is the best fit for you and your loved ones.
Final Expense Insurance
Final expense insurance is a type of permanent life insurance policy used for funeral and burial payments, or other outstanding debts the deceased has accrued, paid directly to the beneficiary. Typically, these policies can be purchased later in life (usually for amounts between $1,000 to $50,000) and don’t require an exhaustive medical examination. Answering a few health queries will determine if you are eligible or not. However, affirmative answers to some of these underwriting questions (i.e. Is the customer confined to bed? Do they have a non-intervened aneurysm? Have they been diagnosed with Alzheimer’s, AIDS, or other terminal illness?) may lead to disqualification or a graded benefit period, where the payout in coverage is reduced during the first couple of years of the policy.
Premiums for final expense insurance vary by the benefit amount you choose, and choosing this total will depend on the type of funeral and burial services that you wish to have. Simple cremation ceremonies do not cost as much as grand remembrance gatherings.
Even though final expense insurance payouts generally have no restrictions in their use, it is imperative to read and compare each company’s offerings, or contact an insurance agent if necessary, to consider the particulars of your post-mortem wishes. Due to age, medical conditions, and financial assets, you might be better off choosing one of the other available options.
Life Insurance
If you have the wherewithal to acquire a more robust life insurance policy, then, by all means, proceed. Purchasing life insurance should be standard practice for most people. It is meant to consider all kinds of financial burdens the deceased leaves behind, in addition to funeral costs. This includes the loss of income and debts related to medical bills, credit cards, auto loans, or mortgages. However, associated costs and the need for medical examinations, or overall questions about health and lifestyle, could keep potential customers away. Nevertheless, there are policies with affordable premiums that serve as attractive options.
Premiums and coverage will depend on the type of life insurance requested: permanent or term. Permanent insurance policies offer lifetime coverage and can build cash value. As long as premiums are paid, coverage remains intact. Due to the broad type of coverages offered, more thorough checks of your medical history are expected, as well as substantially higher premiums.
Term life insurance policies, on the other hand, do not offer lifetime coverage and are instead set for a specific number of years (5, 10, 20). Because of this, premiums are inexpensive compared to permanent insurance. However, this also means that when the term expires the customer is no longer insured. Customers whose terms have expired, or are about to, should consider final expense insurance to make up for the lapse in coverage.
Pre-Need Insurance
Pre-need insurance, or pre-paid plans, are offered by funeral homes across the country as a means to manage and pay for funeral services. By predetermining what is going to be covered, the service providers take care of everything related to the process, thereby removing one less worry for the next of kin.
However, pre-need plans present levels of risk that other options do not. For starters, they are not as affordable as final expense policies. Furthermore, plans are established directly with a specific home and are non-transferable. Funeral homes can go out of business and customers can decide to relocate to another city. Any amounts already paid are unrecoverable.
Additionally, coverage can be guaranteed or non-guaranteed. If guaranteed, payments made will cover services regardless if future costs for such services go up (as they usually do). However, with non-guaranteed coverage family members may need to pony up additional payments to cover for the change in costs. Different funeral homes have very different pricing options for similar packages; so if you decide to go this route, please shop around first before committing to a plan.
Self-Funded Funerals/Burials
As its name states, the self-funded option means that any death-related expenses will be paid for directly from your personal savings or financial assets. The main benefit in this case is avoiding a middle-man; savings are set aside in a CD, savings or investment account to be used for this specific purpose. Instead of overpaying for services (a possibility with final expense insurance and pre-need plans), with this option customers maintain control of their finances, potentially earning interest and not committing to services beforehand.
Nonetheless, difficulties may arise in releasing the funds if the will or other required legal documents have not been taken care of.
Unavoidable Decisions: A Recap
Nobody wants to leave their families in a worse financial position after they’ve passed on. But planning for the eventual costs and expenses of after-death arrangements is a meaningful way to unburden your loved ones.
As we’ve seen, each option offers benefits and risks. Permanent life insurance is probably the most complete option but also the costliest. Pre-need plans carry the most risk because of the uncertainty that comes with them. final expense insurance strikes a balance between cost and needs. The self-funding option would be optimal, but not everybody has the resources to foot the bill.
No matter which option is chosen, the most important part of preparing for funeral/burial expenses is communicating with your loved ones about your plans and wishes. Even difficult conversations need to be had, and alleviating these concerns for grieving family members is more than enough reason to assume its monetary costs.