Is pre-need insurance worth it?

When your burial benefit goes straight to the funeral home.

Logan Sachon

Logan Sachon

Published August 16, 2018

Funerals can cost upwards of $10,000, and many people rely on their life insurance death benefit to help their families cover the cost of burial.

But while the death benefit from a standard life insurance policy can be used for funeral costs, there are also funeral insurance policies meant to be used explicitly for funeral payments. Pre-need insurance is one of those policy types. Read on to find out if it’s a good option for you.

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What is pre-need insurance?

Pre-need insurance is used to pay for the costs of funeral services and burial or cremation. What’s unusual about pre-need plans compared to other types of insurance is you work directly with a funeral home. They’ll price expenses — cemetery plot, services, casket, burial, 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, and one of the first things they need to decide on is the funeral.

That can be difficult when they’re already grieving — they have to make choices about funeral homes, negotiate with funerals directors, and agree on funeral arrangements. It can be a lot to do on top of grieving.

The best thing about pre-need insurance is that it takes guesswork out of the situation by providing your family with a pre-arranged funeral. With a pre-need policy, you work with a funeral home and funeral director ahead of time to settle on what you want for your funeral plan. Not only are the decisions made, the service has been paid for, too. Your pre-need insurance policy pays for the costs and there’s not much else to handle.

That can make it easier on your loved ones, both in that they don’t have to figure out how to pay for a funeral, and that, by virtue of setting up the policy in the first place, you’ve already planned the service, so they don’t have to wonder what kind of send-off you want.

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.

Another downside to pre-need policies is that they’re not flexible. 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 non-refundable and non-transferable, so you’re tied to whatever you choose, or risk losing your policy and the payments you’ve made into it. And if the funeral home you chose goes out of business, you may be out of luck.

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 typical term life policy.


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Pre-need insurance vs. 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 finalexpenses.

The difference between these two is that while pre-need insurance is paid directly to the funeral home for a predetermined amount, final expense insurance works like other life insurance types and you choose the beneficiary. Your family gets the death benefit and can use it to pay for funeral expenses, but they don’t have to. 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, or whatever they want.

One similarly is that it is possible to pay the funeral home directly with a final expense policy. This is called making an assignment, your loved ones will receive whatever’s leftover after the funeral home covers their costs.

Read more about final expense insurance.

Other life insurance alternatives

For most people, a term life insurance product is their best bet for leaving behind a legacy and ensuring that their final expenses, including funeral costs and outstanding medical expenses and other debts, are paid.

Term life insurance is typically the most affordable type of insurance, and it 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.

A Policygenius agent can help you decide which kind of policy makes the most sense for your situation. You can start by getting free life insurance quotes.