You don’t wake up in the morning, turn to your spouse, and say “Honey, let’s buy some burial insurance.”
Who does that? Mostly no one.
Most of the time, people buy burial insurance upon death of a loved one. That usually is the impetus to get people going. So, you just apply with any old carrier.
Or, you receive a brochure in the mail which says something like, “Don’t hesitate. Set up your funeral costs now!”
Additionally, you see an infomercial on late-night TV regarding final expense cost.
You haven’t done anything, feel concerned, and make the phone call. Or, you apply!
We at My Family Life Insurance say: STOP! You might be doing yourself a disservice and applying in haste. Yes, there are some burial insurance policies you should avoid. In this article, we discuss the 5 types of burial insurance not to buy, and 3 you should consider.
What Is Burial Insurance?
Burial insurance isn’t rocket science, although many treat it this way. Burial insurance is simply a whole life insurance policy designed to pay for your funeral and burial costs and some other end-of-life expenses.
Burial insurance policies usually have a small death benefit, like up to $25,000.
Again, though, burial insurance is life insurance. Really, any type of life insurance can be “burial insurance”. However, there are 5 types we feel you should avoid that we describe below.
OK, John, you say. Can’t I just go to the funeral home and set something up?
Yes, but that can be rather limiting. In our opinion, we feel that life insurance is the easiest and most efficient way to pay for your burial costs. Why?
We discuss those advantages next.
Advantages Of Burial Insurance
Here are some basic advantages of burial insurance.
(1) they usually pay out much quicker upon death compared to other types of life insurance policies. Upon your death, your beneficiary receives the money or you can assign part of the death benefit to the funeral home of your choice
(2) unless you have significant health complications, coverage is day 1 (i.e., tax-free if you die the next day, your beneficiaries will have the money to pay for your funeral)
(3) the death benefit is income tax-free. Other ways of savings, such as an annuity or savings account, can be taxable to your heirs
(4) lets you stay in control. Pre-burial services through a funeral home could be disadvantageous in that the services apply only to the home and nowhere else. What if you decide to move? A life insurance policy allows you to have the money for “anywhere.” We really are not making that up
(5) if you die before you completely fund your funeral, your heirs are on the hook with the funeral home
(6) they usually cover moderate to significant health conditions such as obesity, heart conditions, etc
(7) a bit of a summary of #2 and #3. You don’t know when you are going to die. If you are saving through a traditional savings account or some other vehicle, you could die without your funeral costs adequately funded
If you don’t have money to pay for your funeral, what will your family do then?
Burial insurance is an easy way to do that and give you and your loved ones peace-of-mind.
How Much Do Funerals Cost
As mentioned, burial insurance (sometimes called final expense insurance) usually is whole life insurance which offers a cash value. Death benefits range from $1,000 to $25,000 depending on the carrier, your age, and if you have significant health conditions.
Sounds good, but how much do funerals cost?
That is a great question. Peruse on the internet, and you will find varying ranges. According to the National Funeral Directors Association, the average funeral in the United States costs about $8,500. However, this amount excludes any cemetery costs. Add another $6,000 for cemetery costs, and the average funeral costs about $15,000. This amount excludes any incidentals such as a meal after the funeral.
Cremations generally cost much lower, in the $5,000 range.
So, you’ll want to apply for a burial insurance policy in this range or an amount you can afford.
But, as we said, people misstep here and purchase the wrong kind. Let’s talk about the 5 types of burial insurance you should not buy.
The 5 Types Of Burial Insurance NOT To Buy
Now that you have some understanding of burial insurance, you may think that burial insurance is all the same. As we said, any life insurance policy is a burial insurance policy. Why? Your beneficiaries receive the death benefit and can use it to pay for your burial needs.
However, some types of life insurance policies are not designed to be burial insurance. Here are the 5 types of burial insurance not to buy.
Term Life Insurance
We believe term life insurance is the foundation of any financial plan. It provides the best combination of low cost and death benefit coverage. While many carriers offer additional riders, such as critical illness coverage, term life insurance is life insurance.
However, it should not be used as burial insurance. Why?
Two reasons: term life insurance covers a temporary term period for our unexpected death. We don’t know when we will die. If you die outside the term, such as 20 years or 30 years, you will have no money to pay for your funeral.
“Well, John, I can always reapply at the end of the term, right?” you ask. Sure you can, but who knows what your health will be like. The carrier can deny and decline you if your health changed.
If you do have a term life insurance policy, make sure it has a conversion option to whole life or some type of permanent insurance. And, make sure you exercise that option when you can. The sooner, the better. These conversion options usually come with no evidence of health insurability. You covert all or part of your term policy to permanent coverage. The younger you convert, the lower the cost. If you need help, we assist many clients with their term life policy conversions. Feel free to contact us.
“Why whole life, then?” you ask. Good question. Whole life is designed to last your “whole life.” Since you don’t know when you are going to die, whole life, or another type of permanent insurance, is the most beneficial.
These policies were popular in the 1980s and 1990s when interest rates were high. While we won’t go into great detail (we have written extensively about universal life and indexed universal life), the success of these policies are based on interest rates.
If interest rates are higher than those shown in the insurance illustration, the policy cash value will grow. If actual interest rates are lower compared to the illustration, then the cash value would most likely decline, requiring a higher, additional premium to keep the policy in force. Since interest rates dropped significantly, those universal life policies from the 1980s and 1990s are upside down (i.e. inadequately funded), requiring higher-than-normal premiums to remain in force.
Universal life policies require vigilance because of the interest rate and insurance cost effects. If you have a universal life policy and need a death benefit, a viable solution could be to transfer the cash value to a burial insurance whole life policy. We have helped many individuals with their upside-down universal life policies.
Policies That Don’t Protect You From Medicaid Spend Down
While whole life burial insurance has advantages, it has a drawback. Generally speaking, the cash value generated by the policy is not protected from Medicaid spend down rules for nursing homes. It’s a spendable or “non-protected” asset.
What does this mean?
It means Medicaid can force you to use the cash value in any final expense or burial insurance policy towards paying for long-term care costs BEFORE it will pay.
If you don’t know anything about long-term care, know that individuals aged 65 and over have a 7 in 10 chance of needing some type of long-term care service in their lifetime. So, the chance of receiving some type of care is very real.
However, in our experience, these policies tend to terminate which means you spent money for nothing. We receive phone calls all the time from worried beneficiaries about the burial insurance policy.
One viable solution is to use a funeral trust. We have discussed it extensively. These trusts are a great way to (a) pay for your funeral and (b) ensure the money is there, giving you and your heirs peace-of-mind. The trust protects your cash value from Medicaid. There are usually no costs to set up a trust. Some states allow these trusts and others don’t. Talk to us to find out.
Even if you opt to not use a funeral trust, at least check them out for understanding. Know that you can transfer the cash value to a funeral trust anytime. A traditional burial insurance policy isn’t “bad” by any means, but it does leave you open to this spend down possibility.
We would rather see you covered with some type of burial insurance than none at all.
Guaranteed Issued Whole Life
These policies will give you life insurance without any underwriting. You fill out an application, and voilà, you have life insurance. It is whole life insurance. How does that sound?
Well, it sounds good. However, these policies are much more expensive than a traditional burial insurance policy. They are expensive because people who have significant health conditions purchase these policies. These people can’t obtain traditional burial insurance because of their health. The carriers know this and price the risk accordingly.
Most of the time, we can find a burial insurance policy for the same death benefit, but a lower cost. So, we include guaranteed issue whole life here because you can probably find a policy for less.
Nevertheless, these policies can serve a purpose for those who use oxygen, or had cancer but haven’t been cancer-free per the terms of the carrier for a traditional policy.
These policies are also advantageous for people with down syndrome, Huntington’s Disease, AIDS/HIV, and more. These conditions are, unfortunately (and currently), uninsurable through traditional burial insurance underwriting.
You can see the premium costs on our quoting tool. Just make sure you select “poor health”. We do work with one carrier that is much more affordable, assuming guaranteed issue life insurance is the right option for you.
However, in our experience, even those with moderate health conditions, we can find a comparable policy at a lower cost. It’s best to check and avoid guaranteed issue life insurance if you can.
Any Insurance That Comes In The Mail Or You See On TV
This brings us to where we started. You see the brochure in the mail or the advertisement on TV which tells you to “buy now!”. Or, the “buy insurance for only $1 down!” While these might sound good, the only policy that is right for you is the policy that fits your specific situation.
How do you know if the brochure in the mail is the right policy for you? You don’t. You might be throwing your hard-earned money to a policy that can’t meet your needs. It’s like throwing your money away.
We at My Family Life Insurance don’t want to see that. If you work with us, we have the knowledge and expertise to select the right policy for your situation. We do everything on the phone. Don’t want to talk on the phone? Oh, you are tired of those hard-sell life insurance agents? We aren’t those. We can email or jointly fill out the application together. There are many ways to accomplish what you need without us being intrusive in your life.
So, be careful with those mailed advertisements for burial insurance. If you receive one, contact us, and we would be happy to discuss your situation to see if that mailed advertisement makes sense.
3 Types Of Burial Insurance You Should Buy
There are a few policies we like our clients to buy for burial insurance outside of the traditional whole life insurance policy. Of course, if you can obtain a whole life policy at a an affordable premium, that is great. (Know that if you have to go to a nursing home, we can protect the cash value in that policy.)
When you start your search for burial insurance, consider these options as well.
Guaranteed Universal Life Insurance
I think guaranteed universal life insurance (GUL) is a great choice for burial insurance. It is part of the universal life family, but you can call it a distant second cousin.
Why do we like it? Here are the reasons:
(1) Can be much cheaper than a traditional whole life burial insurance policy
(2) there is no cash value, likely. So, what does that mean? It means you don’t have to worry about the Medicaid spend-down
(3) you can purchase a higher death benefit for a lower premium compared to a traditional burial insurance policy
(4) it will last your lifetime, just like a burial insurance policy. There is no possibility of “imploding” like a traditional universal life policy
These policies don’t have cash value and will last for a near life. (You specify the age the policy terminates age 90, 95, 100, or even 121). If you are healthy with a few minor health complications, this type of policy might be a better fit than whole life, burial insurance.
Think I am joking? Please check out the premiums yourself. Just select “lifetime” under the “type of insurance” and input your information.
All things being equal, a GUL policy is a better all-around value than a traditional burial insurance policy.
You really won’t hear other agents talk about this option. Honestly, I don’t know why. One disadvantage of a GUL is that people need to have no health conditions to low/moderate health conditions. Other than that, it works very well. Nevertheless, a guaranteed universal life policy does work very well as burial insurance.
A Fraternal Insurance Policy
I bet you will never hear from an agent about using a fraternal benefits insurance carrier for burial insurance.
These carriers are small, rather unknown, and not available in every state.
Yet, they offer premium rates much lower compared to for-profit insurance carriers.
Yes, you inferred correctly. Fraternal benefit societies are not-for-profits. Because of their not-for-profit structure, they keep costs low and therefore premiums low. Any profit they make gets put back into their members and the communities their member’s support. My family and I have most of our insurances and annuities with fraternal benefit societies.
Fraternals offer unique life insurance options that many for-profit carriers don’t offer. And, their burial insurance premiums are cheap, too. Let’s say you are a 55 year-old male wanting $25,000 of burial insurance. You have a few health complications, but nothing major.
You go to your local agent, or someone else you find on the internet. The agent quotes you $80 to $85 per month, depending on the carrier. You think, “Geez. Maybe, I can do better.” You can. You find us, and we quote you $58.88 per month for $25,000 with dividends reinvested in the policy. Then, there are a few others in the mid $60s per month.
Many agents discount fraternals. I don’t know why? Sure, many are small in size. Moreover, they aren’t available in every state. However, most have been around for over a hundred years. They have seen – and lived through – every economic crisis in America. As one executive with a fraternal told me, “John. We have never missed a death benefit claim.”
In a time where consumers and agents alike spout AM Best ratings, is there a better example of trust and conservatism than maneuvering through the Great Depression, war, credit squeezes, more war, more recessions, and now the coronavirus epidemic? I say no.
I mentioned this option earlier. A funeral trust can offer the ultimate protection for your burial insurance needs. A funeral trust does not follow the Medicaid 5 year-look back provision, which means this option can be implemented in crisis situations. Additionally, it protects the cash value in your burial insurance policy. And, at no additional cost.
Your loved ones really don’t need to worry about your funeral needs because you’ve protected the funds with the trust.
This doesn’t mean a traditional burial insurance policy is bad by any means. As I always say, some coverage is better than none.
Here is an example illustrating the value of a funeral trust.
You purchased a burial insurance policy years ago, with a $10,000 death benefit. It has a cash value of $6,500 today. Question: What does the carrier pay out to your beneficiaries upon your death?
$10,000, John, you say.
That is right. However, that $6,500 is yours. That does not belong to the carrier.
Yes. For example, if you decide tomorrow to terminate your burial insurance, the carrier mails you a check for $6,500.
The carrier pays $3,500 out of its reserves to pay the remaining amount upon your death.
So, possibly at some point, you are faced with a decision: is it worth surrendering $6,500 for $3,500?
When the cash value of your policy equals 50% of the death benefit, I would start thinking about a funeral trust. It can prove invaluable.
Now You Know 5 Types Of Burial Insurance Not To Buy, And 3 You Should Consider
We hope this article made you aware of the 5 types of burial insurance NOT to buy, and 3 that you should. What do you do next with so many options?
Contact us. Really. We can help and have the knowledge and expertise to match what you need for your specific situation. Many agents and agencies try to do that, but we ACTUALLY do that.
Call, email, or fill out the form below. Just include some pertinent information about yourself say you need to some help determining the right burial insurance.
Additionally, the great thing about contacting us? There’s no risk. That’s right. You see, we are required to have duty of care to you. Many agents don’t. Do you know what that means? It means we have to put your interests before our own. So, you already know when you contact us, we are putting our best foot forward to help you. And, if we can’t, then you learned something new, and we will part as friends. It is that simple.