Whether it has a gentle name, like "final expense", "memorial" or "pre-need insurance," or is bluntly called burial insurance, there are a variety of plans being sold to people who want to make sure they’ve tied up all their financial loose ends before they depart this life. Burial insurance is, in fact, a form of life insurance, and can be a term or permanent life policy. Many insurance companies sell it, and it is sometimes included in the pre-need packages offered by funeral homes.
The Burial Insurance Sell
Often marketed to seniors, burial insurance plays to many powerful practical and emotional needs.
Easy to get. You can buy the policy online or on the telephone without being subjected to a medical exam. Applicants are asked about age, smoking history and whether they currently have some serious conditions, and for some policies acceptance is guaranteed. Some require a two-year premium-paying period before you can collect and only insure you to 100 years of age. This may not seem like a problem, but one out 10 people who survive to age 65 are now expected to live past 95.
Seemingly inexpensive. Burial insurance can be purchased for small amounts, such as $5,000 or $10,000, while other whole or term life insurance may require substantially larger minimum coverage. The premiums for burial insurance may therefore seem more affordable than bigger benefits policies, but look closely before you decide it’s a bargain.
A vehicle of love. The ads can be touching, touting burial insurance as one of the most important things you can do for your family so they don’t have to struggle to pay for your funeral and settle your bills. This is a worthy goal, but burial insurance is neither the only, nor necessarily the best, way to achieve it.
Life Insurance: Similar Cost, Much Higher Benefits
Consumer advocates have raised red flags about burial insurance. It’s “a predatory type of insurance,” according to J. Robert Hunter, director of insurance at the Consumer Federation of America. People who buy it tend to be less educated, minority and low-income, and they get a poor deal. Hunter reports he recently helped a woman buy a 20-year term life policy with $75,000 in coverage for the same premium as a $5,000 burial policy.
Here’s why burial insurance is usually a bad deal. The very fact that a medical exam is not required and acceptance is guaranteed means you’re being insured as part of a high-risk pool of people. For the insurer to make a profit, the premiums have to be high relative to the benefit. (For related reading, see: Who Should Buy a Guaranteed Live Insurance Policy?)
Yet most people, even with severe health issues, qualify for policies many times better than burial insurance. Don’t assume poor health locks you out of underwritten term or permanent life insurance policies. Term life insurance expires after a set period, and you may need to go through the process again and not be eligible at that point, so find out what the options are when the term expires. Permanent life insurance, as the name implies, is guaranteed to cover you as long as you pay the premiums.
A Third Option
Another strategy for making sure your survivors have money to pay for final costs is to contribute regularly to a small savings account for that purpose, set up either as a trust or simply as a joint account with your designated survivor. This money can be withdrawn immediately if needed after you die, so survivors won’t have to wait for the insurance check or probate.
The Bottom Line
Think through your goals before you decide on how to set aside money for final costs. If the pressing issue is to make sure there are sufficient funds available to survivors to pay for a funeral and settle bills, a term or permanent life insurance policy can be purchased, or a bank account set up, for that purpose.
If the main concern is to ensure your wishes for burial, cremation and/or memorial service will be funded and followed, and the demise is expected in the next few years, it may also pay to make pre-need, pre-paid arrangements with a funeral provider. If a longer life is anticipated, this route has drawbacks, such as a possible change of heart about the services desired or a move to a location far from the funeral site.
(For related reading, see: Prepaid Funerals: Frugal to the End.)