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If you haven’t set aside funds to help your family pay for funeral, medical or other expenses after your death, funeral insurance can be one way to ensure your loved ones can afford those costs.
What is funeral insurance?
Funeral insurance – also known as “funeral insurance” or “final expense insurance” – is a type of life insurance intended to cover final expenses and funeral costs. This is a whole life insurance policy that is purchased in smaller amounts, usually around $5,000 to $25,000.
Since funeral insurance is designed for a specific purpose, it is not intended to serve as life insurance for families with large financial obligations such as a mortgage or college tuition. It is often marketed to older people on tight budgets who might not otherwise have the savings to cover funeral expenses when they die.
How does funeral insurance work?
When you take out a funeral insurance policy, you choose the amount of coverage you want and designate a beneficiary. When you die, the beneficiary can file a claim to receive the death benefit and use those funds to cover funeral-related expenses. This can include funeral and viewing, cremation, medical expenses, legal fees and more.
Funeral insurance often has a graded death benefit, which means your beneficiaries will not get the full death benefit if you die within the first few years of the policy. Instead, they get a refund of the premiums you paid and some interest.
Funeral insurance is typically either a simplified issue or a guaranteed issue life insurance policy.
- Simplified issue life insurance: There is no medical examination for simplified issue life insurance, but if you answer “yes” to any health questions, you may be disqualified. For example, simplified issue applications often ask if you live in a nursing home or have HIV.
- Guaranteed issue life insurance: You cannot be turned down for a guaranteed issue life insurance policy. There is no medical examination and no health related questions. These amenities make it a very expensive way to buy life insurance.
How to get the best funeral insurance
When it comes to finding the best funeral insurance, you need to consider your estimated final expenses, your budget and any specific policy needs, and then choose a reliable insurer that can meet those needs.
Here are some considerations when shopping for funeral insurance.
- Does the insurer offer cover in the amount you need?
- Does the premium fit your budget, or do you need to adjust your coverage?
- Is a medical examination necessary?
- Does the insurance company have favorable customer ratings?
- Does the insurance company have high industry ratings, such as from AM Best?
Many major insurers will allow you to get a funeral insurance quote online. It is a good idea to compare life insurance quotes from several insurance companies before making a decision.
How much does funeral insurance cost?
A $10,000 funeral insurance policy costs an average of $47 per month for a healthy 50-year-old man, according to an analysis by Forbes Advisor.
Factors that contribute to the cost of funeral insurance include:
- Amount of coverage
- Tobacco use
- Overall health
Funeral insurance tends to be a more expensive option than other forms of life insurance when you compare the death benefit to the cost of premiums. This is mainly because applications for funeral insurance policies usually do not require a medical examination or detailed medical information, which increases the insurance company’s risk.
How much does a funeral cost?
The national median cost of a funeral with a viewing and burial was about $7,848 in 2021, a 6.6% increase over the previous five years, according to the National Funeral Directors Association. The median cost of a funeral with cremation was approximately $6,971, an increase of 11.3% over the previous five years.
Keep in mind that your own funeral costs can be much higher or lower, depending on which services you choose and where you live.
Is funeral insurance worth it?
Funeral insurance is worth it if you only need a small policy to cover final expenses.
A funeral insurance policy is convenient because it does not usually require a medical examination or lengthy application. The premiums are also cheaper than more comprehensive permanent life insurance, and coverage is guaranteed.
On the other hand, since funeral insurance does not pay out a high death benefit, your family may be on the hook for additional expenses after you die. Also, since there is often no medical examination, you will not enjoy a discounted rate for being healthy either.
Depending on your situation, funeral insurance may not be as good value as other types of life insurance.
Alternatives to funeral insurance
Funeral insurance is not your only option to cover final expenses. Before committing to a policy, first consider these alternatives.
Funeral insurance required in advance
It essentially works as a payment plan for funeral expenses that you set up ahead of time. You choose the specific funeral home, as well as your final arrangements that you prefer. It then prices out your final expenses, which you can pay all at once or in installments over time.
Permanent life insurance
This type of insurance covers you for your lifetime (as long as the premiums are paid). It is quite a bit more expensive than term life insurance, but there are a variety of permanent life insurance options, such as whole life, universal life and variable life, which come with different costs and benefits. Permanent life insurance also has a cash value that grows over time, which you can withdraw or borrow against.
Payable on death (POD) account
While you can certainly set aside money in a traditional savings account to pay for funeral expenses, the money can be tied up in probate after your death. A POD account, on the other hand, allows you to set aside money for a funeral without the risk of it going into probate. You name a person who can access the money when you die. They are not allowed to make withdrawals before then, but you can add or withdraw money to the account at any time.
You can set up a trust so that it owns your existing life insurance policy. When you die, the trustee makes a claim and funds are distributed according to your instructions. There are also specific funeral trusts, which allow you to set aside money for a funeral and name a trustee. The trustee will use those funds to pay for your funeral expenses after you pass away.
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