If you’re concerned about paying for the rising costs of funerals, you’re not alone. The average price of a funeral now ranges between $7,500 and $10,000 and continues to rise. If you consider the cost of land per square foot for a plot of land in the cemetery, it’s some of the most expensive real estate in the country.
Jump ahead to these sections:
- Your First Option - Burial Life Insurance
- Your Second Option – Pre-Need Funeral Insurance
- The Two Types of Burial Insurance – Simplified Issue Life Insurance and Guaranteed Issue Life Insurance
- Should You Buy Burial Life Insurance?
Because of this, many people purchase burial insurance for the specific purpose of paying for funeral and burial costs. Burial insurance is generally more expensive than a standard life insurance policy, like term life insurance, but it can make good sense for seniors or uninsurable individuals (discussed later).
In this article, we’ll look at the two types of burial insurance you’ll need to decide upon burial life insurance and pre-need funeral insurance, their differences, and their benefits.
Your First Option: Burial Life Insurance
Burial life insurance, also known as funeral insurance or final expense insurance, typically refers to a permanent life insurance policy, such as whole life insurance or universal life insurance, not term life insurance. Death benefits of burial insurance policies range from $2,000 to $25,000, depending on which life insurance companies you’re comparing. The most common face amount is $10,000 because that approximates the average cost of a funeral.
Many seniors buy burial insurance because it requires no medical examination. In some cases, the policies are guaranteed-issue, regardless of the applicant’s health history or condition. This is perfect for adults age 50 and over, who can start having health challenges when they reach this age.
In addition to paying a death benefit, permanent life insurance policies have a cash value component. Part of your premium payment goes towards the death benefit, and part of it goes towards the cash value portion of the policy, which can be compared to a savings account. The cash value accumulates as time goes on and earns interest from the life insurance company.
Buying a life insurance policy with pre-existing conditions and a policy that builds up cash value is more expensive than traditional life insurance policies.
Most insurers allow you to pay for your policy in one of three ways.
Lump-sum: You make one premium payment, and your policy is paid for. Some people prefer paying this way to avoid paying each month or when they’re buying coverage for a parent. Since only a single premium payment needs to be made, the policy won’t lapse later when your family needs it.
Fixed period: If you’re employed and concerned about paying for burial insurance when you’re retired, you can pay for a specified period of time, such as 10 or 20 years while you’re working, and not have premiums to pay later in life. Your premium rate will be a bit higher for this benefit, but it can alleviate a lot of pressure when you’re older.
Periodically: Most people prefer to pay monthly and have the premium debited from their bank account. You’ll pay more for this payment option, but you don’t have to come up with a lump sum or pay the larger premiums associated with a fixed-period payment option.
Your Second Option: Pre-Need Funeral Insurance
Unlike burial insurance which a traditional life insurance company usually issues, such as Mutual of Omaha or AIG, pre-need funeral insurance is sold by a funeral home or an insurer associated with them (such as Funeral Directors Life Insurance Company), not an independent agent.
In addition to that difference, others are:
- The beneficiary when you die is the funeral home, not your family
- The amount of the death benefit is generally tied to the cost of services offered by the funeral home
- Payments are made as installment payments
- If you cancel your funeral insurance, you might receive a portion of your premiums back or nothing at all
Like insurance plans, pre-need funeral plans will vary according to the state in which you reside, and in some states, the funeral home can’t be named as the beneficiary of the life insurance policy.
A disadvantage of funeral home insurance is that, unlike an insurance company, you can’t check the financial strength of a funeral home, which could mean the loss of all of your premiums if the funeral home becomes insolvent. There would be no return of premium in that case, and your family could be responsible for funeral costs.
Pre-need insurance policies can also be inflexible. If you move to another area or need to make changes to your funeral later on, you may not be able to per the terms of the policy.
Another reason some people choose not to purchase pre-need funeral insurance is that the funeral home’s prices aren’t locked in. If their pricing structure increases and becomes greater than the policy’s death benefit, your heirs will be responsible for the difference. But, if the funeral home’s prices get lower, any excess death benefit will go to the funeral home, not your family.
The 2 Types of Burial Insurance – Simplified Issue Life Insurance and Guaranteed Issue Life Insurance
Many seniors purchase simplified issue life insurance and guaranteed issue life insurance policies. Let’s look at both.
Simplified issue life insurance
This type of burial insurance has several advantages; namely, no medical exam is required, only a handful of health questions, and you’ll know quickly if you’ve been approved for coverage, not after weeks or months.
Insurance companies use a process called underwriting to gather information about people applying for life insurance. If you’ve ever applied for a traditional whole life or term life insurance policy, you may remember answering dozens of health questions and taking a medical exam done at your home by a paramedic. Underwriting is a lengthy process that can take 45 to 60 days or more if the insurance company wants to obtain and review your medical records from your doctor.
Insurance companies recognized that many people don’t want to go through this lengthy process to buy a life insurance policy, which is why simplified issue life insurance was introduced. In addition to policies being issued quicker, simplified issue life insurance can make sense for:
- People who don’t want to take a medical exam
- People who don’t like needles
- People with pre-existing health conditions who wouldn’t qualify for the lower rates with traditional life insurance or can’t get approved for those policies
Because the underwriting for simplified issue policies requires less information from applicants, insurers find it more difficult to classify people into health classes, as standard insurers do. This makes these policies riskier than a traditional life insurance policy, causing simplified issue life to be about twice as expensive as a fully underwritten policy.
Guaranteed issue life insurance
As the name implies, this type of policy is guaranteed to be issued if you apply for it and meet certain age parameters, typically requiring you to be 45-85 years of age.
The underwriting with guaranteed issue policies is almost non-existent. No medical questions are asked, no exam is needed, and no doctor’s records will be ordered.
Guaranteed issue life insurance is more expensive than traditional life insurance, even more expensive than simplified issue life insurance. Because the risk is higher for the insurer, they will sell lower face amounts, typically limiting them to be $25,000. With simplified issue, they’ll issue policies up to a $50,000 face amount. A life insurance agent can help you determine how much life insurance you may need.
Simplified issue and guaranteed issue life insurance policies are similar in a few ways:
- Like permanent life insurance policies, simplified issue and guaranteed issue policies accumulate cash value as part of the policy.
- Coverage for both policy types lasts as long as you continue to pay the premiums.
- Premium rates are based on your age, gender, and location.
Should You Buy Burial Life Insurance?
Your health condition, financial condition, and life insurance needs should be considered when deciding if you need burial life insurance. If you have $10,000 in savings, you may not need to buy burial insurance unless you want that money to be used for another reason – like leaving it behind for family members.
If your health permits, you’re probably better off purchasing term life insurance rather than simplified issue or guaranteed issue life insurance. Term life is the least expensive type of policy on the market, but it is fully underwritten, and you will be required to answer health questions and have a medical exam completed. The more underwriting an application requires, the lower your rates will be.
If you’re a relatively healthy senior, guaranteed universal life insurance might be the right type of burial insurance for you. It’s a hybrid policy that combines term insurance with a cash value component, and it’s guaranteed to stay in effect until you reach the age of 121 or another age specified in the policy. There is some underwriting involved—medical questions and an exam— making it the least expensive type of burial insurance available.
Guaranteed issue life insurance is the most expensive form of coverage available and should be used as a last resort if you need to buy burial insurance.
There is no incorrect type of life insurance to buy when you need life insurance for your family. Permanent or term life, simplified issue or guaranteed issue, whole life or universal life—what type of life insurance you own is irrelevant when a check is written to your family after you pass away.
All of these policy types will provide the money needed to pay for your final expenses and allow you and your family to have the type of funeral you desire. Consult with an insurance agent or financial advisor to get help finding the best life insurance policy.