Funeral Insurance Guide: Types, Tips, and Smart Planning

Funeral insurance, also known as “final expense insurance,” “cremation insurance,” or “burial insurance” is one way to plan ahead to cover the costs of your funeral without having to burden your loved ones. While consumer advocates don’t recommend funeral insurance, for some, it is an option that gives them peace of mind.

We’ll explore the types of insurance that could pay for your final expenses as well as offer tips on what to consider when comparing them. We’ll also offer some alternatives.

As a side note, these days, traditions are changing and not everyone even has a funeral. But when we talk about funeral services and/or funeral planning, we are talking about two distinct aspects, the preparation and disposition of the body (cremation, burial or something less common like body donation or “organic reduction”) and any kind of service that’s planned, whether it is a memorial, a funeral, a celebration of life, a scattering or just a big party or wake.

Choosing the Best Funeral Insurance Policy for Your Needs

According to Forbes, funeral insurance is a type of life insurance. It is usually a small whole life insurance policy that is “pay only for funeral costs and other final expenses.” These policies often do not require a full medical exam and are aimed at seniors and may be in poor health, according to Forbes. U.S. News and World Report recently ranked the best choices for funeral insurance if you want to see how they stack up.

But according to Insurance.com, there are many types of insurance that can be used to pay for funeral expenses, not just funeral insurance. The site also offers some advice on things to look for including understanding the rules around waiting periods, coverage for pre-existing conditions and graded death benefits. If, for instance, you die within the first two years of the policy, some insurance companies won’t pay death benefits or will pay reduced benefits. 

One benefit of funeral insurance that is paid directly to a funeral home is that it has a shorter waiting period than other policies, so talk with your funeral director or insurance broker to see what makes sense for you.

Whole Life Insurance vs. Funeral Insurance: What’s Best for You?

Another option for paying for your funeral includes a whole life insurance policy, which as the name suggests, is a policy that typically lasts your entire life and builds in value and earns interest over time. Life insurance is best purchased when you are young and healthy, but talk with a trusted insurance agent, financial planner and/or your chosen funeral provider to understand your options.

Term Life Insurance: Affordable Alternative for Funeral Costs

Some consumer advocates suggest buying term life insurance instead of funeral insurance. With term life insurance, as the name suggests, you are buying the policy for a set amount of time, say 10, 20 or 30 years, for example. It does not have a cash value like whole life insurance because it does not have a mechanism for growing with interest. As long as you continue paying for your term life insurance, your beneficiary will be paid if you die during the “term.” Term insurance is usually much less expensive than whole life insurance. The Nerd Wallet site has tools for determining which kind of policy might be right for you.

Navigating Benefit Payment Options for Funeral Insurance Policies

You have a couple of choices regarding how the benefit will be paid. Some choose to have a policy with their funeral director named as a beneficiary while others choose a family member. 

Consumer advocates recommend the second option. Also, it may take some time to be paid out for the policy because you’ll need to provide a death certificate which can take several weeks to receive. You can talk with your funeral provider or your insurance agent about how long you should expect to wait to receive payment and ask how long a period of time you or your loved ones will have to pay the bill for the services. According to U.S. News and World Report, small benefits (i.e. funeral policies) are often paid out in two to four weeks.

Insurance.com explains that depending on the policy you buy, you may pay one lump sum or payments over time. Some policies may only have the lump sum option. Your chosen funeral home may also have a preneed or prepaid funeral plan which is a contract that includes payments for the services they’ll provide later. Some funeral directors are also licensed insurance providers. You can choose the method that works best for you and your family. Each state has different laws around these plans.

Essential Tips for Buying Funeral Insurance Wisely

Insurance.com offers these tips when purchasing funeral insurance:

• Determine whether you have life insurance or other savings that may be used for funeral expenses. Don't buy coverage that's not essential.
• Review your state's laws on pre-need insurance before you meet with a planner at a funeral home.
• Discuss a burial policy with your family and lawyer.
• Research different companies and options.
• Remember that insurance policies have a "free-look" period. This 30- to 60-day time period entitles you to review your policy and cancel it without penalty if you don't approve.

Experts from leading consumer advocacy groups caution against funeral or 'final expense' insurance policies that may employ scare tactics and confusing, misleading information, steering individuals towards decisions based on emotion rather than sound financial planning. These advocates suggest considering all strategies for covering funeral expenses, including allocating funds in a dedicated savings account or opting for term life insurance. 

Funeral Insurance and Medicaid Spend Down Strategies Explained

The advice from the Funeral Consumers Alliance is similar to other consumer advocates with the important caveat that prepaying for a funeral or buying funeral insurance is “worth it” if you are needing to “spend down” assets to be eligible for Medicaid. The site has more tips on what to consider if you decide to prepay or purchase funeral insurance. Many people work to reduce their assets at the end of life if they think they may need to rely on Medicaid coverage. For those people, buying funeral insurance may be worthwhile. Spending down for Medicaid eligibility is a complex process and you may want to secure help from an attorney or other professional planner. 

Using Payable Upon Death (POD) Accounts for Funeral Expenses

An option to consider if you are not purchasing funeral insurance is to get a “payable upon death” bank account. The POD account ensures that your loved ones can be paid “quickly and easily,” Forbes explains.

Whether you choose to purchase funeral insurance, whole life or term life insurance or put the money in a POD savings account, you are helping your family cope with the expenses they’ll have to tackle when you die. But no matter how you fund your final disposition and celebration, you can preplan without prepaying.

Simple instructions you can leave for your family can help them navigate the often confusing process. For example, do you prefer burial or cremation? Do you want a funeral or later service?

Smart Preplanning for Funerals: How to Do It Without Prepaying

According to the Funeral Consumers Alliance, you can do price comparison shopping well ahead of when a funeral home is needed. Shop around and choose the plan and provider you like best and fill out a prearrangement form there, the site suggests. The FCA says do not leave these plans in a lockbox, though. Make sure you talk loved ones through every detail and give them copies of every contract or written wishes.

Whether you feel more comfortable purchasing a funeral insurance policy, putting the money aside in a POD account or buying a different kind of insurance, the important thing is that you are planning ahead for your final goodbye. By making the plans ahead of time and understanding that those plans will cost money, you will be helping your loved ones focus on honoring your memory rather than struggling with paying for the expenses. To know how much to expect those plans to cost, you can find average costs on the National Funeral Directors Association website.

Don't wait until it's too late to make your wishes known. Begin crafting a plan that reflects your desires and provides for your loved ones. Visit our plan ahead page to learn more and download our preplanning guide.