What to Know About Pre-need Funeral Plans vs. Funeral Life Insurance

October 16, 2020
Jonathan Fritz
B.A. Risk Management
Life Insurance Agent

It 's a given that you minimize risks and impacts to you and your loved ones by buying various types of insurance. Chances are, you have auto, health, homeowners, and life insurance either now or at some point in your life. 

There's another type of insurance that's often overlooked but can provide protection when your family most needs it. Setting aside dedicated funds for your funeral can be accomplished in a couple of different ways.

Pre-need funeral plans

Pre-need funeral plans are sold by funeral homes and pay specifically for funeral expenses. These plans are sometimes referred to as pre-paid funeral insurance plans.

Because funerals often cost $10,000 or more, this can remove an unexpected expense that will otherwise fall on surviving family members when a loved one passes away.

Pre-need plans differ, but generally will cover:

  • Funeral home services
  • Memorial services at a funeral home or another location
  • Caskets
  • Cemetery plots and associated expenses,
  • Headstones
  • Cremation services and urns
  • Outstanding medical bills
  • Last wishes costs, such as travel to a particular region for a funeral or the spreading of ashes
The thinking behind these pre-need plans may be well-intentioned, but there are a few drawbacks you need to know about.

First, when you pay for a pre-need plan, you may not need to use the benefit for a long time. It all depends on how long the person stays alive, who is covered by the policy.

If it 's 10, 15, or 20 years, that 's a long time to tie up money that could be invested somewhere else with a better rate of return. 

Also, because the money is on account with the funeral home that sold you the pre-need plan, there is the possibility that the provider could mishandle or mismanage (i.e., embezzlement) your money, leaving you in the cold when it's time to use the benefit. At other times, a funeral home could simply go out of business or declare bankruptcy, leaving you with a substantial loss that you may not even discover for years to come.

Although the federal government took steps to try and curtail funeral provider abuses with the Funeral Rule of 1984, this law does not apply to many of the features in pre-need plans. Pre-need plans are governed solely by state laws, meaning that protections can vary widely from state to state.

This lack of oversight means that pre-need plans are an unnecessary gamble that you don 't need to take, especially when there is another more suitable option available to you. 

A better choice may be funeral life insurance

Funeral life insurance provides maximum protection for funds when you need access after a loved one passes away. You may also hear it being referred to as burial insurance

Funeral insurance policies cover many of the same expenses as a pre-need plan. But your funds are overseen with a higher degree of scrutiny because insurers are heavily regulated by the federal government.

It is a form of life insurance, but the most significant differences between funeral insurance and regular whole life or term life insurance are the intent of the policies and the amounts.

Funeral insurance is strictly intended to be used to cover funeral expenses. In contrast, traditional life insurance is designed to provide for all the long-term needs of a family when a loved one passes away.

As a result, funeral insurance policies are written for smaller amounts. Policies typically provide $10,000 to $25,000 of coverage. A traditional life insurance policy may be written for $250,000 to $500,000 or more. 

The other benefit of funeral insurance is that when it is part of an estate plan, the policy removes the need to use some of the long-term life insurance funds for an immediate short-term need.

A beneficiary can use funds for other costs as well. After all policy-related expenses have been paid, the remaining amount is sent to the beneficiary. 

Also, in some cases, the person with the policy can designate how the remaining funds can be used. For example, this might include a donation to a specific charity.

How much funeral insurance do I need? 

That depends. There 's no sense in paying higher premiums for too much coverage. So, before you buy a policy, you need to think about what kind of expenses you will have. Ask yourself:

  • What type of funeral do I want? Burial or cremation?
  • Do I have a burial plot already picked out and paid for?
  • What kind of headstone or marker do I want?
  • Will there be transportation costs?
  • How big do I expect the funeral to be, and what services will a funeral director provide?
  • Do I want to be embalmed (some states require it, and some do not)?

If you 're not sure about the details, you can talk to a funeral director or a licensed insurance agent who specializes in funeral insurance to help you better understand what costs could be.

Be aware that the Funeral Rule requires funeral services and product providers to make an itemized list available to you that clearly states what services they offer and at what price. This is called the General Price List (GPL) and will help you make decisions and avoid paying for things you don't need or want.

Are there different types of funeral insurance policies?

Yes. What policies you qualify for may be based on a short health history assessment, except in cases where a guaranteed issue policy is offered. 

Funeral insurance medical exams are pretty much the same as for life insurance medical exams. You will undergo a verbal questionnaire and urine and/or blood samples will be taken. Many times, these exams are performed in a person 's home and should take 30 minutes or less. Some funeral insurance policies do not require a physical exam

Level Benefit Funeral Insurance pays the full amount when you die, as soon as you are approved. They are issued based on the policyholder having no disqualifying health issues. These policies tend to be the lowest cost, but not everyone will qualify.

Graded Benefit Funeral Insurance can be written if pre-existing health issues are discovered during the initial health assessment. Graded plans don't pay the full amount immediately. Instead, benefits ramp up over time, and the ramp-up period will vary from provider to provider.

Modified Benefit Funeral Insurance is another type of graded plan, but the payout schedule is different, based on higher risks. It takes longer to ramp up to a full payout amount.

Guaranteed Issue Funeral Insurance requires no health screening, and everyone will be approved. These are typically for people who can't get any other form of funeral insurance. Payouts are even more restricted in the first couple of years of the policy. Policy terms will differ, so it's always best to shop around if you 're considering a guaranteed issue policy.

What are the different ways to buy funeral insurance?

You can buy funeral insurance in a couple of different ways.

Online. It is easy, quick, and can be purchased 24/7 in most cases. Often, you can use quote comparison to see a side-by-side comparison of costs. You 'll need to enter your date of birth, gender, the state you live in, and the amount of coverage you want. You will also need to declare if you have any pre-existing health issues or not.

These options will be confirmed with an agent over the phone, and if everything checks out, you can get instant approval without ever leaving your home.

By mail. This is usually for guaranteed issue policies. They are the most expensive, and going this route could be a mistake if you're relatively healthy. Also, benefit amounts are typically capped at lower amounts, perhaps $10,000 to $15,000, so you could be limited that way as well.

Through a licensed agent. An agent can readily answer all of your questions and do the best job of matching you with the best policy for your needs. Assuming you qualify, there are generally no policy cap amounts when buying a policy this way. 

Are there different types of agents who sell funeral insurance?

Yes.

An independent funeral insurance agent does not work for a specific insurance company. They can represent many life insurance companies and can save you money due to that flexibility.

A captive funeral insurance agent works for one company only. They only sell products offered by that company. People choose a captive agent most of the time because they already have a pre-existing relationship through other policies, such as life, health, or auto insurance. 

A licensed funeral director may sell funeral insurance; however, most of the time, they don't sell life insurance. Instead, they sell pre-need plans. This allows a customer to pay for a funeral in advance and assumes the customer will hold their funeral at that facility. It generally benefits the bottom line of the funeral facility and not you as a customer.

It's important to distinguish between a pre-need plan and funeral insurance if you talk to a funeral director about purchasing them.

Saving money on funeral costs

Funeral planning can be a prickly subject, but if you can give it some dedicated thought, you may be able to save on funeral costs and be able to buy a lower-priced policy, also saving some money in the process.

To fully understand how to save money, get a copy of a General Price List first. Then you can look for ways to trim costs.

Consider a different headstone, such as a flush or lawn-level marker instead of a bench headstone. Costs vary widely in this area.

Consider cremation, paired with a memorable service, also to reduce costs quite a bit. Spreading ashes vs. interment can save money as well.

You may want to explore a pre-existing family plot. There are cost savings associated with buying a cemetery plot for several family members at one time.

After you buy a policy, review it from time to time, in case your needs change.

The younger you are when you buy a policy, the cheaper the premiums will be. You may pay more over time, but the amortization costs will make it easier at a time later in life when you may be living on less income.

The good news is that you can continue to buy funeral insurance into your 60s and 70s. In a few cases, you may be able to buy a policy if you 're 80 or older, but your options, if they 're available, will be limited. 

Other ways to pay for funeral costs 

If you haven 't decided to buy a funeral insurance policy, you can explore some other ways to pay for a funeral instead. Consider these:

  • Social Security Death Benefit. To report a death, call 800-772-1213.
  • Supplemental Security Income. Available if you are a low-income SSI recipient.
  • Military Death Benefit. If the decedent was currently serving or is an honorably discharged veteran, there are some limited benefits available through the VA.
  • A Medical Savings Account may have funds you can use.
  • If Medicaid covers you, see if any funds are available in your state for funeral expenses. 
  • Some states and counties offer indigent burial programs. Check with your county 's department of social services for more information.
  • Body donation to a local university medical school or private organization to support research and education.
  • Direct cremation. This is the simplest, no-frills form of cremation and ranges from as little as $400 and up.
  • Burial on a family property. Allowed in many states but check on zoning laws and health regulations first.