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How Does Funeral Insurance Work?

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Funeral life insurance oftentimes referred to as burial or final expense insurance refers to a group of life insurance products that are intended to pay for funeral and other end-of-life expenses.

Most individuals use funeral life insurance as a means to ensure that their funeral is pre-arranged and paid for in advance, that way the burden isn’t left to the beneficiary.  According to the National Funeral Directors Association, the average cost of a funeral is more than $8,500.  Keep in mind that this is not taking into account the cost of a burial plot, headstone, flowers, or transportation – which can easily set the funeral cost total over $10,000.

Types of Funeral Insurance

how does funeral insurance work

The term funeral insurance refers to any insurance policy or other contract purchased with the intention of covering final expenses.  Your coverage amount will depend on how much you expect your final expenses to cost.  In most states, life insurance agents and funeral directors are the ones licensed to write funeral life insurance.

Variations of funeral insurance range from traditional whole life insurance to policies that strictly cover funeral expenses:

  • Family member as beneficiary – Most individuals already have a traditional life insurance policy in place with enough coverage for funeral expenses. However, if you do not have a policy, you can buy funeral life insurance with the intention of covering funeral expenses.  You are able to name a family member as the beneficiary, and discuss your funeral plan with them.
  • Funeral director as beneficiary – A funeral home may offer a small whole life insurance policy with an agreement for funeral services, as long as the funeral director is the named beneficiary. This allows you to pay for all or part of your funeral expenses using your existing life insurance policy, while the death benefit is distributed to the funeral home rather than your family.
  • Pre-need funeral insurance – A pre-need agreement covers the burial plot, headstone, embalming or cremation, casket or urn, and transportation.

Funeral Insurance Premiums

The schedule of your premium payments will depend on the type of policy you purchase and how much coverage you have.  Your premium will be either a lump-sum payment or ongoing monthly payments.

  • Traditional Whole Life Policy – Coverage lasts throughout a lifetime as long as premium payments are made. Coverage ceases if payments are discontinued.
  • Single-Premium Policy – Provides immediate coverage for the full death benefit once lump-sum payment is made. This is most often the only option for those over the age of 70.
  • Graded Death BenefitCoverage amount increases gradually. When choosing a 5-year payment policy, the death benefit may be 30% of the face amount the first year, 70% the next year, and 100% thereafter.

Things to Consider

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  • Do you have enough life insurance coverage and/or savings to cover your funeral expenses?
  • Have you reviewed your state’s laws regarding pre-need insurance prior to meeting with the funeral planner?
  • Have you talked to your family or lawyer about your funeral life insurance policy?
  • Have you compared different insurance companies and their available options?

Keep in mind that life insurance policies offer a “free look” period, which is typically a 30- to a 60-day time period where you’re able to review your policy and cancel it without penalty should you decide against keeping it.

When You’re Ready to Purchase

  1. Verify the validity of all professional licenses, such as the insurance agent, funeral director, and insurance company.
  2. Never sign anything not created, filled out, or altered in your presence.
  3. Collect all agreements in writing
  4. Be sure that agreements include services, products, and arrangements sold to you or that you are including in your funeral or pre-need plan.
  5. Verify if funeral home offers price guarantees, and if not, be sure to fully understand their policy.
  6. Check the portability of your funeral life insurance policy or pre-need policy.
  7. Verify policy cancellation fees or refunds for surrendered policies.

One More Thing…

Most states have provided consumers additional protection by creating laws that provide further rights for pre-paying funeral expenses.  It’s important to note that some states have banned the sale of certain types of funeral insurance policies due to the fact that instances occurred where policyholders paid more in premiums than they received in death benefits.  Additionally, other states require that payments for funeral life insurance be made to the life insurance company, rather than the funeral home itself.  The state department of insurance for your residence is the best resource for your local laws.

Each state felt the need to enforce these forms of protection due to the significant issues arising out of pre-need contracts.  For instance, an irrevocable assignment transfers the ownership of your policy to the funeral director.  This means that you do not have access to any of the funds you have placed into this policy.  Likewise, if the funeral director is named as the beneficiary of your funeral life insurance policy, the director is the only one authorized to access the funds of your policy.  As always, be sure to completely understand the terms of the policy.


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