The reasons for purchasing a burial insurance plan, can be as varied as the individuals seeking it. Many need the peace of mind that ongoing income will be there or that financial obligations will be paid off when they pass.
In other cases, there could be the obligation of having to pay a hefty estate tax bill, and life insurance proceeds can pay this debt rather than having to use one’s hard-earned savings.
Yet, there is one need that most everyone will have upon their time of passing – and that is final expenses. These are the costs due to either the funeral home or other entity that takes care of one’s final arrangements. Without some financial plan in place, the debt to this entity will typically fall to a spouse, children, or others who are close to us at that time.
The funds that are needed can come from various sources – but ideally, an individual will have a burial insurance plan in place so that their survivors can quickly pay these expenses and move forward.
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What is Burial Insurance and Why Consider Purchasing This Type of Coverage
Burial insurance, also referred to as funeral insurance, is a type of life insurance coverage purchased to pay off one’s funeral and other related costs.
These expenses can be quite substantial – in many areas of the country, exceeding the $10,000. When you factor in the memorial service, along with their headstone, burial plot, flowers, transportation, and obituary announcement, it is easy to see how that number is reasonable. Unfortunately, many people do not have this type of money on hand for paying burial expenses. Instead, they are forced to dip into their savings, retirement funds, or worse yet, have to put these expenses on credit to pay them off.
And, if the decedent were a retiree whose pension or other income stopped upon his or her passing, these additional bills could essentially put a surviving spouse into financial turmoil.
Having a burial insurance policy in place can provide loved ones with the peace of mind in knowing that final expenses are already taken care of and that other assets and savings will not need to be touched.
In many ways, burial insurance works like other types of life insurance policies. An individual pays a premium to the insurance company, and upon the insured’s passing, the insurance carrier pays out a sum of money to the named beneficiary. There are, however, some differences when you compare burial insurance vs. life insurance coverage.
First, burial, or final expense, insurance is typically purchased by those in the older age bracket. These purchasers are between 50 and 80 years old and can be older, depending on the insurance company offering the coverage.
Another difference between a burial insurance policy and a more traditional type of coverage is that the death benefits on a final expense insurance policy are smaller – in most cases, they will range between $5,000 and $50,000.
This coverage range is typically more than enough to pay for an individual’s final expenses – even if their survivors opt to include additional debts such as uninsured final medical bills or various other unpaid debts.
The underwriting for burial insurance will often not include the applicant’s requirement to undergo a medical exam, which means the proposed insured will not have to meet with a paramedical professional and provide a blood and urine sample.
Because of this, an individual who has rated into a high-risk life insurance policy can typically qualify for this type of coverage – even if they have certain types of health conditions.
Often, burial insurance is a form of permanent life insurance, giving the policies will both a death benefit and a cash value component.
The cash that builds in the policy’s cash value portion is allowed to grow on a tax-deferred basis. There is no tax due on the funds’ gain or growth until you make a withdrawal.
This tax-advantaged treatment can essentially allow the cash to grow and compound exponentially over time. Some top-tiered life insurance companies will offer term policies as funeral insurance products.
The policyholder of the burial insurance policy may either borrow or withdraw the cash for any reason they choose – including to pay off a debt, supplement their retirement income sources, or even take a nice vacation.
This cash does not require repayment. However, the policyholder must be aware that any unpaid amount is charged against the death benefit paid out to the beneficiary.
Because burial insurance is a permanent form of coverage, the insurance company cannot cancel the death benefit coverage – provided that the policyholder continues to make the premium payments. Also, the premium amount will usually be guaranteed not to increase – even as the insured increases in age, and even if they contract an adverse health condition.
How Benefits on Funeral Insurance Policies Work
When shopping for burial insurance, you must understand how the death benefit payout since not all burial insurance policies payout in the same manner.
For example, in some cases, a policy may payout on a graded benefit scale. A graded benefit means that if the insured dies within the first two or three years of policy ownership, the policy’s beneficiary may only receive a certain percentage of the stated death benefit versus the entire amount.
In other cases, should the insured die within the first two or three years, the beneficiary may only receive back a refund of the paid-in premiums (and possibly an amount of additional interest). Therefore, before moving forward with the policy purchase, it is essential to be sure that you know exactly how the policy’s death benefits will payout.
Always answer all of the questions on the application for coverage as completely and as truthfully as possible. If the insurer should discover that an application was completed incorrectly – or information was omitted on purpose- then it could nullify the life insurance policy, even after it has been in force for some time.
Burial insurance policies will also have a contest period. During this period, if the insured dies due to an ailment that they did not disclose on the application or did not list that they needed a smoker’s policy, the insurer may not be required to pay out the death benefit to the beneficiary.
When you sign up for a no medical exam policy, being truthful is even more critical because they will be more vigilant in paying out the death benefit.
When the beneficiary receives the life insurance death benefits on a burial insurance policy, similar to other life insurance types, the proceeds from these policies are received free of income taxes.
They are also not considered part of the estate, so they do not have to go toward any debt or liabilities. Even a person with bad credit who has taken out loans can make sure final expenses are taken care of through a burial policy.
In some cases, the beneficiary of a burial insurance policy can even be the funeral home handling a person’s arrangements. This way, the expenses can be paid out directly from the policy to the services provider.
Having this arrangement can also help to smooth out the process, as well as to avoid any delays. Should there be any funds leftover from the burial insurance policy after payment of all funeral expenses, a beneficiary can be named who will receive these funds.
However, it is essential not to get burial insurance confused with pre-need coverage, as these two products are not the same thing. While preneed funeral coverage sets aside funds for a person’s funeral before the need arises, these funds will go directly to the funeral home and pay for the funeral home’s services and the products purchased from there.
Where Can Burial Insurance Plans Be Purchased
Today, there are a variety of places where you can purchase burial insurance. Under some state laws, a funeral home may be allowed to offer this type of insurance coverage. In most cases, a licensed life insurance agent or broker is required to purchase a funeral policy.
While you can purchase a burial insurance policy via individual insurance carriers, this is not the best route to obtain the very best premium price.
Typically, before making your final policy decision, it is a good idea to compare more than one final expense policy from several insurance carriers. That way, you can get a good idea of the coverage and the varying premium quotes – from there, you can then determine which is the best situation for your specific needs.
When doing so, it is typically best to work with either a company or an agency that has access to more than just one final expense insurance carrier. That way, you can compare all of the information that you need in one convenient place, without the need to go from one insurance company to another. Using an independent agent saves you a great deal of time and frustration throughout the application process.