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Prepaid Funeral Coverage (a Ripoff) vs. Burial Final Expense Insurance

Prepaid Funeral Plans vs. Funeral Insurance vs. Life Insurance

From its beginning in 1865, to when it gained popularity in 1920 up until today, the funeral industry has increasingly become more expensive over the years. 

Today, on average, a funeral can cost a family between $6,000-$12,000, depending on whether it’s cremation or burial, as well as the funeral elements included. It’s often quite difficult for families to make such financial decisions especially while grieving.

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That is why most families end up spending more than they can afford because they make these financial decisions in a heightened emotional state. 

In such cases, families may end up in deep debt or even declare bankruptcy after the funeral. Luckily, there is a way to prevent such scenarios from occurring in your family, if you or a loved one dies.

The trick is to pre-plan your funeral expenses in advance. Truthfully, the idea of planning for your death or a loved one may be difficult. 

No one ever wishes for their demise or that of a loved one. It is, however, important for you to always be prepared financially. This relieves your family of the financial burden or possible crisis in the event of death. 

One of the best ways of pre-planning for funeral expenses is through, pre-paid funeral plans, funeral insurance, or life insurance. 

To be able to decide which one is best suited for you, you will first have to understand their differences and benefits. That is why, this post will cover, what the three entail as well as their average costs.

Prepaid Funeral Plans.

A prepaid funeral plan is more of a preparation strategy. It involves prepaying a funeral home for an anticipated funeral.

It is a great way of giving you and your family peace of mind, not just about the funeral expenses but the planning process as well.

How the prepaid funeral plan works is, you first need to come up with a detailed outline of the funeral elements you want. At this point, you could decide whether you want a burial or cremation, or whether you prefer a casket or coffin. 

You could also pick out even the smallest details about the funeral, like flower arrangement, music, location, décor, and catering. Once you’ve settled on your preferred funeral elements, you can now get detailed price estimates so you’re aware of the cost. 

When it comes to payments, you can pay in installments over time until the whole cost has been covered.

Keep in mind while making such arrangements, to be as flexible as possible. That means, not specifying a specific service provider unless it is necessary for your peace of mind

This is because of certain circumstances like the service provider going out of business, which is something the family can’t control. By being flexible, your family can execute your funeral planning more easily, and with confidence that everything is being done as per your wish. 

They also do not need to stress over making any decisions or about any payments.

What is the average cost of a prepaid funeral?

As mentioned, funerals can be costly. As of 2019, the National Funeral Directors Association (NFDA) estimated that the median cost of burial was $7,640. 

This included viewing but not the cost of the cemetery. As for cremation, the estimated median cost as of 2019 was $5,150. This included viewing, for a casket or urn, the price increased to $6,645.

The average cost of a prepaid funeral plan will therefore depend on the cost of a funeral at that time. The beauty of it is, with a prepaid funeral plan you can lick in the current funeral prices. That way you and your family are protected from any inflation or rising prices. 

Once you’ve settled on the details, you sign a contract with the funeral home, which will then open up a trust account or insurance policy on your behalf. 

You can then pay in monthly installments, usually between 3-10 years, whichever suits your budget. The monthly installments will be secured in your account until you’ve paid the full cost, and only used once you die.

What is a revocable trust?

This is a type of interest-bearing trust account a funeral director opens on your behalf, where your monthly installments for funeral expenses are paid to. It’s normally set up after you sign a contract with the funeral home. 

You can appoint a trustee who will oversee how the money is used in the vent of your death. With a revocable trust account, you can make changes like who the trustee or beneficiary is, at any time. You can also cancel or cash out whenever you wish.

What is an irrevocable trust?

An irrevocable trust is similar to a revocable trust, in that it’s a type of trust account where your monthly installments are paid. You can also appoint a trustee once the account is set up. 

The difference, however, is that it does not have cash value. You can also not dissolve or cash out an irrevocable trust account. Any changes made in terms of the beneficiary or trustee require the permission of the current trustee.

Criticism of prepaid funeral plans. 

Prepaid funeral plans make it easier on the family, not just financially, but also in terms of the planning process. You can also have peace of mind knowing that your funeral will be conducted as per your wish and your family will not suffer any financial crisis. 

Still, prepaid funeral plans can be very risky.

Death in most cases is uncertain. We never know when we will meet our demise. It is possible that the funeral home you made the prepayments to, may go out of business. It is also possible that they may gain a bad reputation and be forced to shut down. 

In that case, you would have lost all the money you paid to them. This means that your family would now have to pay for the funeral arrangements in case of your death.

That is why prepaid funeral expenses are a better option when one is more certain about the inevitability of death. Cases like old age or an untreatable terminal illness with limited time are ideal situations for a prepaid funeral plan. 

Funeral Insurance.

At times of death is not certain, or you simply do not have the heart to think about the details of the funeral. In such cases, a prepaid funeral plan may not be your ideal choice. 

Still, it does not mean that you cannot be financially prepared for whatever the cost of the funeral may be. That is where funeral insurance comes in handy. It’s a specialized insurance policy designed to cover your funeral expenses so your family doesn’t have to bear the cost.

What is burial insurance?

burial insurance

 Burial insurance is another term for funeral insurance. It’s a policy designed to cater for the expenses of your burial or cremation costs in the event of your death. It also covers any other final expenses connected to your funeral.

Burial insurance operates in the same way as a life insurance policy, in that, you pay a certain premium until the day you die. 

In the event of your death, the beneficiaries listed in your policy are given the amount of the policy to help in covering the funeral expenses and any other pending bills. 

Unlike life policies, however, burial policies are much easier to acquire. They do not require you to undergo a medical examination and aren’t limited to healthy policyholders only. 

You simply need to answer a few questions when taking up a burial policy. Additionally, they have relatively lesser premiums, unlike life policies. There are two main types of burial insurance policies to consider, that is pre-need insurance and final expense insurance.

Final expense insurance.

Also referred to as a modified or smaller whole life policer, final expense insurance is a cheaper alternative to the traditional life policies. It requires a shorter process to acquire and doesn’t limit policyholders with insurance conditions.

The cost of the policy will depend on the health, gender, and age of the policyholder as well as the insurance company you choose to use. 

On average you could pay a premium of $30-$70 or a flat-out amount of $5,000-$25,000. If you’re elderly or have a medical condition, especially terminal, the cost may be higher. If you’re younger the cost may be cheaper. Keep in mind that the cheaper the premium, the lesser the benefits.

Like life insurance policies, the premium is paid until death. As long as you pay the premiums, then your beneficiaries are guaranteed to receive the benefits. 

In the event of your death, the beneficiaries can use the money to pay for your funeral expenses. They could also decide to use the money to clear pending bills like any existing medical bills. 

Alternatively, the money could be used to replace your income until the family can adjust. It’s up to your beneficiaries to decide how the money will be used.

Pre-need insurance.

Sometimes referred to as a pre-need funeral contract, this is a type of burial insurance taken out through a specified funeral home.

 Unlike the final expense policy, the policyholder is the funeral home. The home is also the one that acts as the beneficiary since, upon your death, they are the ones to receive the payment. 

Another difference between preneed and final expense is that the benefits of a preneed policy can only cater for the funeral expenses and nothing out of it.

The price or cost of the preneed plan will depend on the cost of services offered by the funeral home. Your preneed plan will be designed to cover the cost of your preferred funeral services. 

While picking out preneed insurance, consider the type of services included in the plan, that is guaranteed or non-guaranteed services. 

Guaranteed services are those that protect your family from any inflation or rise in cost. That means that if the funeral home charged $1000 for the service, then even if the price increased to $2000 upon your death, the family doesn’t have to pay the difference. 

The opposite is true for non-guaranteed services. Consult with the funeral directors to know which services are guaranteed and which ones are not, so you can be better prepared.

Criticism of funeral insurance.

Funeral insurance is a better option compared to prepaid funeral plans if you want to prepare financially for your funeral, without getting into the details of arrangements. What’s more, is that it does not limit applicants with health conditions like with traditional life policies. 

You also go through a shorter process to acquire it and end up paying a lesser premium. For a policy like final expense, the beneficiaries can use the money they receive from the policy in other things other than funeral expenses. 

The downside however is that the death benefits of the funeral insurance are lesser than what you’d get with a life insurance policy. 

That is why funeral insurance is more affordable. Another possible disadvantage is that the payout may not be immediate depending on the company. 

For final expense insurance, the family may need to solicit the money from elsewhere to cover the funeral costs before the policy pays out.

Funeral insurance is ideal for individuals with health conditions who aren’t eligible for a life insurance policy. It is also suitable for individuals looking for cheaper premiums to cover funeral expenses when the time comes. 

Life Insurance.

Unlike prepaid funeral plans and funeral insurance, life insurance is not specifically designed to specifically cover funeral expenses. 

A life insurance policy is a contract between the insurance company and the policyholder. It ensures that based on the premiums paid by the policyholder, an agreed-upon sum will be paid to the beneficiaries by the insurer, upon the death of the policyholder. 

This money, is, however, meant to replace the income of the deceased, which is why most people take up the policy. It is not necessarily meant to pay for the funeral cost, although the family may choose to use the money for that purpose.

Generally, there are two main types of life insurance, that is term life insurance and whole life insurance.

What is a term life policy?

This is a type of life insurance where the policyholder doesn’t have to pay premiums until death. It is an agreement between the insurance company and policyholder, for a certain term, normally 3-10 years.

In exchange for paying the premiums the listed beneficiaries are guaranteed benefits upon the death of the policyholder.

Note, however, that while term life is relatively cheaper than whole life policies, the benefits are only guaranteed until the term is over. In the event the policyholder outlives the term, then the beneficiaries are no longer covered. 

The policy also has no cash value; therefore, you cannot cash in on the policy. You can, however, take up a new term policy when the term ends, or convert it into a permanent or whole life policy.

What is a whole life policy?

Unlike term insurance, whole life insurance lasts for the longevity of a person’s life. That means that the policyholder must pay the agreed-upon premiums until death. In exchange, the insurance company is to pay the beneficiaries the agreed-upon sum of money if the policyholder dies. 

This guarantee remains intact as long as the premiums are paid consistently without fail until death.

Another difference is that the whole life policy is more expensive compared to the term policy. The whole life policy has a higher premium and a lower fixed payout. It, however, has a cash value that allows the policyholder to borrow against it while still alive. 

With whole life policies, insurance companies are normally very strict when it comes to age and health. Old people past a certain age or those with a terminal or chronic condition may not be allowed to take up a policy. That is because their risk of dying is usually higher, and as mentioned, life insurance policies are about replacing lost income not covering funeral costs.

Does a Life insurance policy expire?

As you’ve seen, the difference between a whole life policy and a term life policy is that the latter is short-term while the prior is more permanent. 

That means that after the specified period, the term life policy expires and the beneficiaries receive no guarantee. With whole life, the guarantee is for a lifetime, until the policyholder dies. At that time the beneficiaries receive the payout. 

Both types of policies can however be terminated at any time. If the policyholder feels that the policy is no longer necessary, they can simply stop paying the premiums and the policy will be canceled.

Criticism for Life insurance.

Life insurance offers larger benefits compared to funeral insurance. It also offers a better guarantee compared to prepaid funeral plans. The downside, however, is that they are more costly and aren’t specially designed for funeral expenses. 

For this reason, the payout is not immediately after death, it normally comes weeks or even months after the funeral. Another downside is that applicants with terminal health conditions may not be eligible to take up a policy.

A life insurance policy is best for individuals who want to secure their families financially long after they are gone, and not just for funeral expenses. Therefore, before picking out life insurance, ensure that your family has an alternative way to pay for funeral expenses.  

Payable-On-Death Account or Totten Trust.

This is another alternative that involves a bank account or investment company. The funds in this account can only be accessed by the beneficiaries only after your death, hence its name, Totten trust, or payable-on-death (POD).

Like life insurance, the funds from the POD aren’t available immediately after death. The family should have an alternative for paying for the funeral as they wait for the funds to be released. Once the funds are released, they can pay themselves back or the loan, if they took one out.

Conclusion:

It’s not easy to imagine your death and no one ever wishes for it. The fact, however, is that death is inevitable. It is, therefore, essential to prepare for it financially. That way, you can protect your loved ones from the financial crisis as well as secure their financial future long after you’re gone.