Funeral Insurance Explained

Your family and/or beneficiaries can, in most cases, use life insurance money to pay for your funeral. The beneficiary of a life insurance policy can generally use the funds for any purpose, including to cover the cost of a funeral, burial or cremation.

However, it’s important to note that the process of receiving benefits may take some time. Following the death of the insured person, the beneficiary must file a claim with the insurance company, complete with a certified copy of the death certificate. The insurance company will then review the claim before releasing the funds. Depending on the company and specific circumstances, this process can take a few weeks to several months. So while you certainly can use life insurance money for funeral expenses, it may not be immediately available when the costs are incurred.

A more timely method of using life insurance money for funeral expenses involves assigning the benefit, or a portion of the benefit, directly to a funeral home as payment. For this to be done, your policy must be assignable — review your policy in detail to find out. Further, in some cases a funeral home will partner with an advance funding (or assignment) company, which can remit life insurance funds within 24-48 hours after verifying the policy is in good standing. The company will charge a fee for this service, but it can be a useful option that your funeral home(s) of choice will likely be able to help you with. 

There’s also the option to purchase burial or “final expense” insurance, typically a whole life insurance policy, that pays out a death benefit ranging from $2,000 to $50,000 specifically for funeral or final expenses. Or, you can purchase a preneed funeral plan, another scenario in which a funeral service provider or cemetery is the beneficiary of funds to cover funeral and/or burial costs. However, there are risks associated with preneed plans — such as lack of legal protection for funds or even fraud — and drawbacks to final expense insurance, which can be quite expensive. Before entering into a contract for either of these options, it’s important to read the terms very carefully and clarify any questions before signing (good practice for any contract).

Sources

“Pre-Planning & Pre-Paying”. Funeral Consumers Alliance. https://funerals.org/get-help/pre-planning-advance-directives/ 

“How Does Life Insurance Work?” Investopedia. https://www.investopedia.com/articles/personal-finance/121914/life-insurance-policies-how-payouts-work.asp 

“The Truth About Life Insurance and Funeral Expenses”. Funeral Basics. https://www.funeralbasics.org/truth-life-insurance-funeral-expenses/ 

“How Whole Life Insurance Works” Investopedia. https://www.investopedia.com/terms/w/wholelife.asp 

“Do You Need Burial Insurance?” Forbes. https://www.forbes.com/advisor/life-insurance/burial-insurance/ 

A final expenses insurance policy is whole-life insurance with a small death benefit, usually between $2,000 and $50,000. Also known as burial insurance, funeral insurance, simplified issue whole-life insurance, or modified whole-life insurance, this type of policy is typically marketed to seniors because it is affordable and easy to qualify for. Most require no medical exam and ask only a few health-related questions during the application process, such as whether or not the applicant smokes or is terminally ill. Some insurers ask no medical questions at all. And the purchaser gets to choose the beneficiary — the death benefit isn’t paid to a funeral home. 

The downside of these policies is that they are usually very expensive relative to the amount of the death benefit they pay out. Further, “guaranteed issue” policies (which are available to anyone regardless of health and age) usually have a waiting period during which time the death benefit will only be paid if the person dies an accidental death. (This is usually two years.) However, the insurer will typically refund the premiums paid plus a certain amount of interest (usually 10%–20%) to the beneficiary of the policy if the purchaser dies before the waiting period is complete.

For some individuals, especially those who are older, final expense insurance may be a good way to cover their funeral expenses when they die. The policies are expensive compared to regular whole-life insurance, but for someone who has little savings and cannot qualify for a more affordable policy due to their health status or age, they may make sense. Premiums are usually affordable because coverage amounts are low. For example, in 2021, a 70-year-old woman living in Florida could buy a $5,000 policy from Mutual of Omaha for $35 per month. 

With that being said, policy terms vary, so it’s worth shopping around. Look for a policy that offers monthly premiums that don’t increase as you get older, and a death benefit that stays the same no matter how long the policy is in force. Steer clear of marketing schemes that seem too good to be true because they almost certainly are. Colonial Penn, for example, is famous for its ads that promise premiums of $9.95 a month that will never increase no matter how old you are. But what it doesn’t tell you is that that $9.95 buys one unit of insurance, and the value of that one unit of insurance decreases every year. For example,in 2021, a unit of insurance at age 50 was worth $1,786. But for someone who is 70, that same unit was worth $717. So, even a very modest $5,000 life insurance policy would have  cost a 70-year-old-woman almost $70 per month. 

Be careful, too, that you compare the same kind of insurance as you shop around. Several insurers (for example, New York Life in conjunction with AARP) are currently marketing term life insurance policies to seniors with coverage amounts between $10,000 and $100,000. These policies look very much like final expenses whole-life insurance, but the premiums increase over time and the policy expires at a certain age (80 in the case of New York Life). And while you will typically have the option to convert the policy to a whole-life policy at that time, the premiums will usually be very high. Further,  if you let the policy expire, your beneficiaries will receive nothing when you die no matter how much you paid in. 

To reiterate, final expense insurance can be a smart purchase for seniors who have little in savings and want only enough insurance to pay for their funeral service. But for those who have cash or other assets to pay for the funeral they want, they may not be the best choice.

Sources

“Colonial Penn Life Insurance Review”. QuickQuote. https://www.quickquote.com/colonial-penn-life-insurance-review/ 

“Finding Life Insurance”. New York Life and AARP. https://www.nylaarp.com/Life-Insurance