Funeral insurance, also called burial, final expense or pre-need insurance, refers to a group of products intended to pay for final arrangements.
Many people use funeral insurance as a way to ensure their funeral is arranged and paid for in advance, so the burden isn't left to their families or beneficiaries. It can also be used by parents to guarantee funeral funding for their children. The average cost of a funeral was more than $7,000 in 2014, according to the National Funeral Directors Association -- but that doesn't include the cost of a cemetery plot, vault (if the cemetery requires it), headstone, flowers or obituaries, which can push the total over $10,000.
Three types of coverage for funeral expenses
There is no standard type of funeral insurance. The term "funeral insurance" describes any insurance policy or other legal contract purchased with the intent of providing for final expenses. The amount of funeral insurance coverage depends on how much you want final expenses to cost. In most states, the only people licensed to write a burial policy are life insurance agents and funeral directors.
Variations range from traditional whole life insurance to policies or agreements that only cover funeral expenses:
- Life insurance with family member as beneficiary - Many people who already have traditional life insurance simply purchase enough to include funeral expenses. But, if you do not have life insurance, you can purchase final expense insurance with the intention of using the proceeds to cover funeral expenses. You can name a family member as your beneficiary, and discuss your funeral plan with them.
- Life insurance with funeral director named as beneficiary - A funeral home may include a small whole life policy with a contract for funeral services, with the requirement that the funeral director is the beneficiary of the policy. In this way, you pay for part or all of your funeral expenses using a life insurance policy that you pay for - and the death benefit goes exclusively to the funeral home - not to your family.
- Pre-need contract with funeral home - A pre-need contract often covers the burial plot, grave marker, casket or urn, embalming or cremation, flowers and funeral cars. Some policies may not specify what the death benefit can be used for. In that case, the money can be used however the beneficiary decides.
Paying for funeral insurance
Depending on the type of policy or contract you buy, you may either have one, lump-sum payment, or continuing monthly payments. A contract with a funeral home will most likely include a payment plan.
Your coverage may determine what kind of payment schedule you have:
- Single-premium policy - Once you make the lump-sum payment, you have immediate coverage for the full death benefit. If you are over 70, you may only be offered a single-premium payment option.
- Graded death benefit - This means the coverage amount increases over time. If you choose a five-year payment policy, you may have a death benefit that is 30 percent of the face amount in the first year, 70 percent the next year, and 100 percent thereafter.
- Traditional whole life policy - The coverage amount stays the same as long as you pay the premiums, but coverage ends if you stop paying.
Tips for considering funeral insurance
- Determine whether you have life insurance or other savings that may be used for funeral expenses. Don't buy coverage that's not essential.
- Review your state's laws on pre-need insurance before you meet with a planner at a funeral home.
- Discuss a burial policy with your family and lawyer.
- Research different companies and options.
- Remember that insurance policies have a "free-look" period. This 30- to 60-day time period entitles you to review your policy and cancel it without penalty if you don't approve.
When you're ready to purchase
- Get all agreements in writing.
- Verify all licenses (insurance company and agent/funeral director).
- Be sure all documents are filled out in your presence. Never sign anything that has been altered or created without your consent.
- Ask your funeral director if they offer price guarantees, and if they don't, find out what their policy is.
- Be sure you have (in writing) that the services, arrangements and products that were sold to you or that you are agreeing upon are included in your pre-need plan.
- Check if funeral arrangements can be moved at any time to any funeral home - in case you move after buying your pre-need insurance.
- Find out if there is a policy cancellation fee or if you can be refunded for services and products if you do decide to cancel.
Many states have given consumers added protection by creating laws that give them additional rights when it comes to pre-paying for funeral expenses. Some states ban the sale of some types of burial insurance policies, because many policyholders paid more in premiums than they got back in their death benefit. Other states created protections which prohibit checks to purchase burial insurance to be made out to the funeral home - they must be made out to the life insurance company. Some states specify that payments made ahead of time for pre-need contracts are placed into a fund which becomes your property and must be available to you at any time. Your state department of insurance is the best resource for local laws.
It is important to keep in mind that states felt the need to implement these protections because of significant problems with some types of pre-need contracts. For example, an irrevocable assignment transfers ownership of your contract to the funeral director, which means you cannot withdraw any payments you have made on this contract. Similarly, if you name the funeral director as the beneficiary of a life insurance policy for funeral benefits, the director is the only person authorized to spend the proceeds of your policy. Always be sure you understand the terms of the policy, and weigh the costs against the policy coverage.