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Tips on pre-planning your funeral and final expense insurance

No one likes to think about their funeral, but planning ahead is a wise financial decision that helps your loved ones and resolves possible disagreements. You can do this with funeral pre-planning, final expense insurance, pre-need insurance, and pre-need trusts.

The median price for a funeral is more than $7,000, according to the National Funeral Directors Association, but costs can run into the tens of thousands.

Let's take a look at pre-planning a funeral, final expense insurance, and what to consider when planning ahead.

Funeral pre-planning

Most funeral homes offer pre-planning services. This allows you to make arrangements for some or all of your funeral, down to every detail. The funeral director will give you a price list for goods and services, which the FTC requires under the "Funeral Rule."

Pre-planning relieves your family of significant stress and uncertainty over arrangements. It may even resolve potential arguments among family members over what you wanted for your services and burial.

If you elect to pre-pay your arrangements, many funeral directors will offer a price guarantee. That means you can lock in today's prices. Similar to everything else in life, funeral prices will only go up so pre-paying is a smart choice.

If you pre-pay, but your prices aren't locked in, your family may need to pay extra at the time of your funeral to make up the difference.

In drawing up pre-paid contracts, funeral directors may offer guaranteed prices for some items but not for others. For example, you may not be able to secure prices on flowers and grave services.

Once you set your pre-planned arrangements, you can elect to pay a portion or all of the bill before your death. This too lifts the burden from family members and helps ensure that your wishes are carried out.

If you do pre-pay, find out what guarantee you have that the money will be there at the time of your death. Some states laws require the funeral home to put a percentage of your prepayment into a state-regulated trust to obtain a life insurance policy with the death benefits assigned to the funeral home. Others states give little or no protection to those that pre-pay.

Also, find out from the funeral home or state governing agency what would happen to your pre-paid money if the funeral home goes out of business or you change your mind about using that funeral home. For example, in event of relocation and that funeral home would no longer work for your needs.

Three other ways to fund a pre-paid funeral

Besides pre-paying for your funeral, there are three other ways to pre-fund a funeral including via insurance or a trust:

  • Final expense insurance
  • Pre-need insurance
  • Pre-need trusts

Let's walk through each of these and help you figure out which one is the best option for you.

Final expense insurance

Final expense insurance, also known as burial insurance or funeral insurance, is a life insurance policy with a low face value, such as $5,000 to $50,000, that you buy directly from an insurance company. Getting final expense insurance is usually easier than getting a different type of life insurance policy.

Final expense policies are either "term life" (which covers you for a specific period or until a certain age, such as 75 or 80) or "whole life" (which covers you for the rest of your life). If you get term life, the policy will likely expire when you reach a certain age or after so many years and you won't get any payout when you die.

Final expense policies are generally either:

  • Simplified issue -- you're asked a handful of medical questions, but don't have to take a medical exam
  • Guaranteed issue -- the insurer issues a policy to anyone who applies with no medical questions asked

People who have a serious health problem may receive a policy with a "graded death benefit," which means the coverage amount increases over time and your beneficiaries won't receive the full face value if you die within the first few years of the policy.

You can name any beneficiary, typically a family member, who would make the claim and receive the money upon your death. That beneficiary would then be responsible for using the money to carry out your wishes.

The beneficiary legally could decide to use the money for anything, so make sure you trust your beneficiary. Also, if your benefit amount exceeds the cost of your funeral, the beneficiary keeps the difference.

For example, if you have a final expense policy for $15,000 and your services and burial end up costing $12,000, your beneficiary would pay the bill and keep the extra $3,000.

Remember that any life insurance policy can be used to pay for a funeral. You can buy any term or whole life policy and instruct your beneficiary to use a portion or all of the death benefit for your funeral.

Standard term and whole life policies, however, aren't offered in low face amounts like $5,000, which is why final expense policies can be handy if you need insurance money only to cover funeral expenses.

If you have other financial obligations, such as a mortgage and dependents who are counting on you to pay for college, you're better off buying a standard term life or whole life policy in an amount that can cover family needs, including final expenses.

Pre-need insurance

Another type of life insurance policy, called pre-need insurance, is intended for the person who selects specific arrangements at a funeral home and wants the assurance that those arrangements will be paid for and implemented.

Unlike final expense policies, which you buy directly from an insurance company, funeral home directors, who are licensed agents, sell pre-need policies. The funeral home is the beneficiary of the policy, and the funeral director receives a commission, like any agent, for selling you the policy.

These policies can be paid in one lump sum or over time. Funeral directors who are agents for pre-need insurance typically offer policies underwritten by just one company. That means you won't be able to "comparison shop" for price -- you'll have to take the pre-need policy rate that the funeral director offers or decline it.

Pre-need insurance works this way. Say you've picked out a funeral home and made pre-arrangements there by selecting goods and services that total $13,500. If the funeral home offers pre-need insurance, you could purchase a policy right there for $13,500.

Even better would be if the funeral home offered a price guarantee for your selections. If they don't, and your future funeral costs $14,500, your family would need to pay the extra $1,000 to carry out your wishes.

Pre-need insurance saves your family effort, too. The funeral director makes the claim, receives the money, and carries out your wishes. Before buying, find out what happens if you change your mind and want to move arrangements to a different funeral home or if the funeral home goes out of business.

Pre-need trusts

Another option is to make pre-arrangements with your funeral director and fund those arrangements by putting cash into a trust, which holds the money until your death and then disperses it to the funeral director.

This arrangement relieves your family of last-minute decisions. But just as with pre-need insurance, if you don't have a price guarantee on your funeral selections, it's possible that the money you put into a trust won't fully cover expenses.

Under this arrangement, you deposit your payment for funeral arrangements into a federally insured bank until your death. Depending on your state, your money may be put into an individual trust account or a "master" trust, which pools many individual trusts.

The value of the trust can rise and fall depending on the investment performance. However, if you have a guaranteed-price contract from your funeral director, he takes on the market risk from the trust and must provide the services you selected no matter how well the trust's investments performed.

Many states allow funeral directors to keep a portion of your trust payment, such as 10 percent to 25 percent depending on the state. Other states forbid funeral directors from retaining any funds.

No matter what amount a funeral director may retain, if you cancel your trust you will receive all your money back.

If trust investments have done well, there will be "overage" between the trust value and the cost of the funeral. What happens then varies by states. Some states allow funeral directors to pocket the difference; others must return the money to the family.

Pre-need trusts can be revocable or irrevocable. Funds in a revocable trust can be withdrawn at any time if you change your mind. But if you're spending down your assets to qualify for social services, such as Medicaid, you'd need to put your pre-paid funeral money into an irrevocable trust, which cannot be withdrawn until your death and removes it from your assets.

Your funeral director may offer both pre-need insurance and trust services. If you're set on using a particular funeral home, your pre-pay options will be limited by what the funeral director has chosen to offer. Funeral directors who offer only pre-need trusts do not have to go through the time and expense of getting licensed to sell pre-need insurance in the state.

Weighing pre-need insurance vs. pre-need trusts

If you're weighing your options between pre-need insurance and trusts, here are some important points to consider:

  • Ask for a guaranteed price plan no matter how you'll fund your funeral.
  • For items and services that cannot be price-guaranteed, ask for a written estimate of the cost, so your family will know what to expect.
  • An insurer may decline you for insurance due to age or health.
  • The funeral home director receives a commission for selling you a pre-need policy.
  • You can't "comparison shop" for pre-need insurance rates; the funeral director chooses your insurer, but you select the face amount.
  • Funeral directors may have financial incentives for selling a large volume of pre-need policies; for example, they may receive extra compensation if they sell a lot of policies for one company.
  • If you use a pre-need trust, make sure your contract includes a cancellation clause. Some states may allow a "revocation fee."
  • If your money is held in a trust, in some states, your family members may be able to strip down your funeral service arrangements and receive cash back.
  • Know where your trust money is being invested; you may receive an annual statement of earnings or be required to report interest income on your taxes.
  • If you received social services before your death, your family cannot receive trust money back; any difference between the funeral cost and the trust amount would have to be returned to the state.
  • If you're buying a final expense or pre-need insurance policy, find out if it's possible you will pay more premiums than your beneficiaries will receive in death benefit.
  • AARP urges you to find out if your pre-paid arrangements can be moved to another funeral home.

Shop around for final expense insurance

Similar to any other type of insurance, consumers interested in final expense insurance should shop around to find the right policy and insurer for them. Have an idea what you want out of your insurance policy and then get quotes from companies. It's also a good idea to check each company's ratings. One place to check ratings is Insure.com's Best Life Insurance Companies.

Additional reporting by Les Masterson

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