Nobody likes to discuss their own mortality or that of a loved one, but what gets discussed even less is the high price tag that is often associated with making a loved one’s final arrangements. Funeral costs have skyrocketed. Not all families can just pool together funds to pay for a funeral service and final resting spot with the average cost of these often will exceed $8,000. Funeral homes today usually want a payment in full at the time of their services rather than offering any alternative payment arrangements.
As with most large expenses in our lifetime, planning ahead will can alleviate some of these concerns and provide one with a clear cut path for dealing with these expenses. If they do plan ahead, the choice that most people make is to purchase a life insurance or burial insurance policy.
Each of these options offer a way to minimize the financial burden passed on to loved ones upon the insured’s death. How do they differ? Which one is the best option for you?
How Does Burial Insurance Work
Burial insurance is a type of life insurance. A burial policy is used specifically to pay for final expenses such as for a funeral service, casket, headstone, etc. Hence it is often also called final expense insurance or funeral insurance.
Burial policies can be purchased up to age 85, and typically cover the policy holder up until age 100. Benefit amounts are commonly between $5,000 and $25,000, but you will find some policies that allow you to exceed that sum.
Along with covering costs associated with one’s funeral and burial arrangements, the policy can also be used towards other final expenses such as the insured’s medical bills, any probate costs, and unsettled debts.
Upon the policy holder’s passing, the death benefit of the final expense policy is paid to the beneficiary named on the policy. After receiving the proceeds, the beneficiary may then allocate the funds to the necessary service providers and/or creditors.
Burial Insurance Payout Options
Death benefits are typically paid out in one of two ways, immediate or graded benefits. A funeral policy with immediate benefits is a “level benefit” policy, meaning that 100% of the death benefit is paid out if the insured passes away any time after the policy is in force.
A policy with graded benefits, on the other hand, pays out a portion of the applied-for death benefit if the insured passes away within a certain time after the policy has been issued.
Common graded benefits look like this:
- 25% of the total death benefit is paid out if the policy holder passes within the first year of the policy being issued.
- 50% of the total death benefit is paid out if the policy holder passes within the second year of the policy being issued.
- 75% of the total death benefit is paid out if the policy holder passes within the third year of the policy being issued.
- 100% of the total death benefit is paid out if the policy holder passes after the policy has been issued for three years.
The graded benefits option is used most often when the insured has certain health complications. Although it may not offer full coverage for one’s final expenses in the first few years, a burial insurance plan with graded benefits does offer a way for someone to get coverage when they otherwise might be declined completely for more traditional life insurance options.
Traditional Life Insurance Options
Typically when people think of life insurance, they think of whole life and term life. Both these options offer a wide variety of coverage options, and the costs are going to vary greatly based on your qualifications and the amount of coverage you are looking for.
Whole Life Insurance
Whole life insurance guarantees that a certain death benefit will be paid at the time of the insured’s passing. Many find whole life policies appealing because there is no risk involved. The entire value of the policy will be paid to the beneficiary no matter what happens. With this guarantee also comes a higher cost and stricter health qualification requirements. Many find the cost to constrictive for their budget or are not a good match for the health requirements, so whole life is the less purchased product.
Term Life Insurance
Term life insurance, as the name implies, pays a set death benefit when the policy holder passes away, providing that the policy holder passes within a pre-determined date range. As an example, a 33 year-old purchases a 20-year term life insurance policy. That means his or her beneficiary will receive the death benefit if he or she dies between the age of 33 and 53. If he or she dies after age 53, no death benefit is paid.
The biggest advantage of term life insurance is its significantly lower cost than whole life insurance. They also have much less stringent health qualifications. On the other hand, there is more risk for the policy holder because they may end up paying all their monthly premiums, only to have their policy expire with no insurance benefit paid out. (Although, they might argue that still being alive is benefit enough.)
Burial Insurance vs. Life Insurance
Shopping for insurance can feel overwhelming for most people when they are faced with the enormous number of options that are available. It will often take some time and thought to decide which policy is best suited for you, but narrowing it down to what type of insurance is right for you is much easier.
When making your decision take into consideration the amount of coverage that you need, your current age, and your budget.
Only burial and whole life insurance offer insurees a guaranteed payout. With term life insurance, there is always the possibility that you collect nothing. A term life insurance policy is also almost always going to stipulate that you must re-qualify for a new policy when the term runs out if you want to maintain coverage. As you are applying at an older age, your renewal is likely to be accompanied by a rate increase. Burial insurance is going to have premiums that remain constant throughout the life of the policy, or even give you the option of a one-time lump sum payment that keeps the policy in force until your passing. Many times the rate for a burial policy is even cheaper than that of the often very affordable term life insurance rates.
Another difference, and one that is very appealing to many consumers, is that burial insurance will not require any kind of health exam in order to qualify. Applicants simply must state that they are not terminally ill and that they are not currently residing in a nursing home.
The biggest benefit of purchasing a burial insurance policy is just knowing that you are not leaving the financial burden of your final expenses for your loved ones to deal with. Mourning your loss is going to be difficult enough without worrying about how they are going to pay for your funeral and final resting place.