It’s no surprise that people look wherever they can for a way to make funerals affordable. Funerals can cost upwards of $10,000, and many people rely on their life insurance death benefit to help their families cover the cost.
But while a standard life insurance policy can be used for this, there are also funeral insurance policies meant to be used explicitly for funeral payments. Pre-need insurance is one of those policy types, but you’ll often be better off going with a more affordable, flexible type of insurance to pay for your final expenses.
What is pre-need insurance?
Pre-need insurance is used to pay for the costs of a funeral and burial or cremation. What’s unusual about it compared to other types of insurance is you work directly with a funeral home. They’ll price expenses — services, casket, etc. — and your insurance policy covers those costs. The beneficiary of a pre-need insurance policy is the funeral home. They’ll get the money directly to pay for their services.
What’s good about pre-need insurance
If you have a typical life insurance policy, your family receives a lump sum of money and must decide how to spend it. That can be difficult when they’re already grieving — they have to make choices about what to buy, how much to spend and more. If you don’t settle those details beforehand, it can be a lot to do in the moment.
The best thing about pre-need insurance is that it takes guesswork out of the situation. You worked with a funeral home ahead of time to settle on what you want, the insurance policy only pays for those costs and there’s not much else to handle. That can make it easier on your loved ones.
What’s bad about pre-need insurance
The worst thing about pre-need insurance is its limited use. You’re paying directly to the funeral home, so your loved ones have no flexibility with the benefit. It can also tie up money for a long time if you end up living longer than you thought. In many cases, you’d be better off investing the money and leaving it to your loved ones.
There’s also a period of time when your plan may not be fully funded. There’s a limitation period determined by your policy. During this time the benefit is reduced. If you die during that period your loved ones will have to cover the difference.
You’ll settle on predetermined expenses when setting up your pre-need insurance policy. That’s why it’s important to shop around and get a cost list from each funeral home. You’ll want to be sure that you’re not overpaying for any services. It’s especially important because most pre-need plans are nonrefundable and nontransferable, so you’re tied to whatever you choose, or risk losing your policy and the payments you’ve made into it.
Finally, considering the small coverage amount you get — just enough to cover the funeral costs — pre-need insurance is pricey. For a comparable coverage amount — or even a much greater benefit — you’re likely to pay less with a different type of insurance.
The differences between pre-need insurance & final expense insurance
Pre-need insurance and final expense insurance are often talked about together, because unlike other widely used insurance types that allow your family to use the money to pay off a mortgage, save for college or have money for retirement, pre-need and final expense insurance have a more focused scope: your final expenses.
The difference between these two is that while pre-need insurance is paid directly to the funeral home for a pre-determined amount, final expense insurance works like any other (albeit smaller) insurance type. Your family gets the death benefit and can use it to pay for funeral expenses, but it’s not tied to that. They can also use the benefit to pay for any last medical expenses or post-funeral expenses, like a get-together with loved ones or travel to spread your ashes somewhere.
However, a funeral home can be paid directly with a final expense policy, similar to a pre-need insurance policy. In the event that you opt for this, your loved ones will receive whatever’s leftover after the funeral home covers their costs.
Other life insurance alternatives
For most people, a term life insurance product is their best bet. It’s typically the most affordable type of insurance, and provides a large death benefit your loved ones can use as they see fit, whether for final expenses or other debts.
However, older or less healthy people may not qualify for competitive term life insurance rates. Those people might be better off with final expense insurance, simplified issue life insurance or another type of life insurance with less stringent health requirements instead of pre-need insurance. They will likely be more affordable and still provide a flexible death benefit.