Life insurance can be a difficult conversation. It's even harder sometimes to talk about funeral insurance.
People don't want to leave their loved ones with debts, but still thinking about your own mortality isn't a joyous topic.
However, funerals can be costly. Funerals often cost between $7,000 and $12,000 -- not including cemetery costs.
There are several options for funding funeral expenses. But before you choose one, take a look at the big picture so you understand the costs and what is covered.
What is funeral insurance?
Funeral insurance is a bit of a misnomer. You can't buy an insurance policy that will cover every conceivable cost related to your death.
The terms "funeral insurance" and "burial insurance" generally refer to small life insurance policies marketed to people who want to leave a little money behind for their families to cover final expenses.
Most big insurance companies don't offer a life insurance policy that simply provides a few thousand dollars to pay for your funeral. The largest insurers typically offer permanent life insurance policies starting at $25,000.
You can often find burial insurance policies of between $5,000 and $25,000. You can decide to pay premiums weekly or monthly. These policies often cost less than other life insurance policies, but your loved ones also get a much smaller death benefit.
Some life insurance companies offer small guaranteed-acceptance life insurance policies and market them 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 permanent life insurance policies provide coverage for the rest of your life and have cash value. The cash account builds over time; you can withdraw or borrow against it, although the amount – plus interest – will be subtracted from the death benefit if you don't repay it. Because these policies are small, the cash value is minimal.
The promise of no medical exam may sound appealing, but you'll get a far better coverage if you're in good health and apply for a traditional life insurance policy that requires health information and a medical exam.
Insurers that don't require health information and an exam price policies higher to cover their risk against adverse selection – unhealthy people choosing the insurance because there is no medical exam.
Read the fine print on any life insurance policy you are considering purchasing. Many guaranteed-acceptance policies pay only a portion of the death benefit if you die within the first two years after purchasing them.
Finally, check the financial rating of the life insurance company before you purchase.
Pre-need insurance is another type of policy you can buy to cover some of your funeral expenses. You buy these policies directly from the funeral home. With a pre-need policy, you choose the services you want for your funeral and buy a policy to cover the cost.
The funeral director will provide a list for goods and services. The Federal Trade Commission requires this under the "Funeral Rule."
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 have to name someone you trust to carry out your wishes.
Many funeral homes guarantee the prices of the items you choose, such as fees for overhead, transferring, embalming, hearse and other basics, says 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.
However, prices might not be guaranteed with other pre-need policies. So make sure you 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.
Your age and the face value of the policy determine the premium for pre-need plans.
With the guaranteed issue plan, full coverage kicks in two years after purchase for three- five- and 10-year payments and in 10 months on a one-year payment plan. If you pay for the policy with one single premium, full coverage starts immediately. Full coverage starts immediately on multi-year payment plans for the first-day coverage plan, which is available for all but those suffering from a critical illness.
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.
Scott Zuckerman, president and CEO of Wexford Financial Strategies in New York, urges you 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.
Keep in mind that a term-life insurance policy will cover you only for the policy's term, such as 10, 15 or 20 years. Only permanent insurance, such as whole life or universal life, provides coverage no matter when you die.
Guaranteed issue plans for funeral expenses are marketed to seniors, but other types of permanent life insurance are viable options for older adults, Zuckerman says.
"I've seen people well into their 80s get life insurance," he says.
Before deciding on a plan, make sure to decide whether it's only funeral insurance you need. If you figure out that your family will need help with a mortgage and other bills, you might want to look at larger life insurance options. Those avenues include a term life policy or a permanent policy with a larger death benefit.