How does funeral insurance work?

By Insurance.com Posted : 01/01/2011

The largest leading life insurance companies generally don't offer permanent life insurance policies for less than $25,000 of coverage. But a number of other life insurers offer smaller guaranteed-acceptance whole life policies and market them as funeral or burial insurance. Guaranteed acceptance means you don't have to provide any medical information--you qualify for coverage regardless of your health status.

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These policies may sound like a good deal, especially since you don't have to go through a medical exam. But that convenience comes with a price. As long as you're in decent health you can get a much better rate per $1,000 of coverage by going through the medical underwriting process and purchasing a larger, traditional policy.

Preneed insurance: what it is, what it covers

Another option for covering funeral expenses is to purchase something called preneed insurance through a funeral home. You purchase the policy after choosing the services you want, and buy enough coverage to pay for the cost. Many funeral home directors are licensed life insurance agents, or they have licensed agents on staff to sell preneed policies. With a whole-life preneed policy, you name a loved one as a beneficiary with instructions for carrying out your wishes, or in some states you name the funeral home director as the beneficiary. The life insurance proceeds go directly to the funeral home to provide all the services you outlined in your plan.

In many cases, the prices of services are guaranteed when you buy a preneed policy, so you can lock in the cost of your funeral. The option works well for someone who wants to specify all the arrangements and pay for them ahead of time, so loved ones don't have to be burdened with difficult decisions or financial worries. The premiums for a preneed policy are based on your age and the amount of coverage purchased.

Finally, it's a good idea to take a broader look at your life insurance needs rather than focusing strictly on funeral expenses. What needs will your financial dependents have when you die? What about other final expenses, such as medical bills and debts? With those questions in mind, you may decide it's more prudent to purchase a larger traditional life insurance policy to cover everything instead of a small policy geared just to the funeral.

For more, see "Funeral insurance: Your final policy."

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