Funeral insurance

What is funeral insurance?

Funeral insurance is a blanket term that can be used to refer to a few different types of life insurance policies. The most common is final expense insurance.

A final expense policy is a small guaranteed-acceptance life insurance policy marketed to seniors specifically for funeral expenses. Guaranteed acceptance means you don't have to answer questions about your health or undergo a medical exam.

These policies are easy to obtain and may also be called burial insurance. They have a small death benefit, usually just enough to pay for a funeral. The payout goes to the beneficiary of your choice, who will then pay for the funeral.

Funeral insurance can also refer to pre-need insurance, a different type of policy altogether. And, of course, since traditional life insurance can be used for any expenses, it's technically funeral insurance, too. 

What is pre-need insurance?

Pre-need insurance is a policy sold by funeral homes to pay for funeral expenses in advance. With a pre-need policy, you choose the services you want for your funeral and buy a policy to cover the cost.

Many funeral homes have licensed life insurance agents on staff who sell pre-need policies. In some states, you name the funeral home director as the beneficiary, so the proceeds go directly to the provider to carry out the funeral according to your plans.

Other states don't allow you to name the funeral home as the beneficiary, so you must name someone you trust to fulfill your wishes.

Many funeral homes guarantee prices, such as fees for overhead, transferring, embalming, hearse and other basics, according to H.W. "Skipper" Ragsdale III, a fourth-generation funeral professional and a licensed life insurance agent in San Diego. With a guaranteed pre-need policy, you don't have to worry about prices escalating and exceeding the death benefit.

Not all policies include this guarantee, so review the contract and understand exactly how much you'll pay, what's guaranteed and what will happen if you can't pay the premiums.

"It's for the person who wants to have his funeral paid for and all choices made and written down, so the family doesn't have to worry about anything," Ragsdale says.

With a pre-need policy, the carrier pays the death benefit immediately – a major benefit, says John E. Lindquist, president and CEO of Great Western Insurance Co., a pre-need insurance carrier headquartered in Ogden, Utah. By contrast, you might wait 30 to 60 days to get the money from a traditional life insurance policy.

However, a pre-need policy doesn't provide any extra benefits to pay for anything other than what is stipulated in the contract.

What does funeral insurance cover?

If you buy a final expense policy that pays out a death benefit to your beneficiaries, they can use it to pay for whatever they want. Since there’s no way to stipulate how it’s spent, it can be used for any funeral and non-funeral expenses.

What expenses other types of burial insurance cover depends on your selections. With a pre-need policy, you’ll be covered for exactly what you selected when you bought the policy.

How much does funeral insurance cost?

The cost of a burial insurance policy depends on the type of coverage, how much coverage you want, and personal factors like your age and health status.

The cheapest funeral insurance is not always the best choice; you might not have enough coverage. Shopping around and comparing quotes for your final expense coverage and other ways to pay for your funeral is important.

If you are young and healthy, you will likely find traditional life insurance to be more affordable than funeral insurance.

Alternatives to funeral insurance

While it's important to know how your funeral expenses will be paid, don't forget to look at other expenses your loved ones will incur after you're gone and consider other ways to provide for the expenses.

Scott Zuckerman, president and CEO of Wexford Financial Strategies in New York, urges people to consider other needs besides the funeral, such as paying medical bills, paying off a mortgage and protecting an estate for heirs.

"It's difficult to peg what final expenses are," he says.

Zuckerman recommends talking to a trusted financial adviser to get a handle on what those expenses might be and the amount and type of life insurance to buy. Rather than purchase a small, guaranteed issue life insurance policy or a pre-need policy for your funeral, you might want to buy a larger, traditional life insurance policy, which could take care of funeral expenses as well as other financial needs your family might have.

You should also look into other ways of saving for a funeral. Your money will likely see more growth and provide more for your final expenses if you invest it wisely rather than paying life insurance premiums.