Death and taxes are said to be life’s certainties. So does it make sense to buy burial insurance? And just what is burial insurance? This article takes a look at the options available and gives recommendations about selecting the right policy.
What is Burial Insurance?
Despite the term "burial insurance" (sometimes referred to as "final expense insurance"), the policy is actually a small whole life insurance policy—almost always $50,000 or less and sometimes as small as a few thousand dollars.
There are several variations. One is a straightforward small whole life policy that is paid to whomever you designate (in this case, presumably the person you want handling your burial or cremation). At least one additional person would also be designated in case the first beneficiary died at the same time you did (for example, if you and your spouse died in an automobile accident).
A second variation is what is sometimes called "pre-need insurance." In this case, the policyholder draws an insurance contract with a funeral home (learn The Key Elements of an Insurance Contract). The contract outlines the specifics of your funeral or cremation, including items such as a plot, a casket or urn, a grave marker, and flowers. Upon your death, the policy is paid to the funeral home, which is then, in turn, obligated to provide the services, sometimes with a guaranteed price. If the funeral home will not guarantee the price, you might well want to discuss with your insurance broker or agent options for increasing the coverage amount over the years (see What Is an Insurance Broker? to learn what they can do for you). This will, of course, also mean an increase in your premiums.
A third possibility, one that is not usually referred to as "burial insurance," is a small term life insurance policy (for a discussion of different types of life insurance, including whole and term policies, see Everything You Need to Know Before Choosing a Life Insurance Policy). Unlike whole life policies, term life insurance covers you only for a specified period of time, but the premiums are lower.
Reasons for Caution
It's quite possible that it does not make sense for you to buy burial insurance, but there are exceptions.
Most insurers do not require a medical examination prior to selling you burial insurance. Why? Because they charge premiums that are high enough to cover their losses.
Let's explain that a bit further. When you buy a typical whole life insurance policy, you are required to undergo a medical examination because the payout on the policy is high relative to a single year’s premium. That is, if you don’t live for some years after buying the policy, the insurer will lose money on it, which is why insurers are looking to insure healthy people. With the smaller whole life polices referred to as burial insurance, the insurers assume that the policyholders are not going to live very long and, therefore, charge a high premium relative to the small amount of coverage they provide (find out What Influences Life Insurance Premiums). That way, you don’t need to live long for the insurer to make a profit on the policy. Similarly, medical examinations are not required for pre-need policies and premiums tend to be high relative to the amount of coverage.
Something to look out for when you read the burial insurance policy before buying is whether the policy pays out in full immediately or not for several years. Some policies, for example, don't pay the full coverage amount if you die within two or three years of the policy's start date. And if you die within six months of that date, the payment might be discounted in addition to being delayed.
There is another potential issue with pre-need insurance. If you purchase the policy years in advance of your death and then move a long distance from the contracted funeral home, the cost of transporting your body to the funeral home after your death might be prohibitive.
A relatively small term life insurance policy might make more sense. But there are potential issues with that option as well. The policy only covers you for a specified number of years, and if you don’t die within the term, you recover nothing. Moreover, premiums for term life insurance often increase over the duration of the policy. And, finally, as discussed immediately below, the policy won’t pay out immediately.
When Burial Insurance Makes Sense
Generally, when someone dies, they are buried or cremated within a matter of days. But most whole and term life insurance policies don't pay off for 30 days or more (find out How to Collect a Life Insurance Payout). This is because the insurer requires proof of death and performs an investigation to ensure that the claim is not fraudulent. With the small whole life insurance policies referred to as burial policies, and also with pre-need policies, payment is usually almost immediate (there may be an exception if the death takes place within six months of the commencement of the policy).
So, if your family doesn't have sufficient funds available on short notice to pay for your burial or cremation, you might not receive much in the way of funeral services—certainly less than what you and your family would like you to have. It’s not uncommon for a funeral and burial to cost more than $10,000, and even a cremation can run several thousand dollars. With a burial policy in place, the funds will be available when they are needed.
What Should You Do?
Consider your situation and options carefully, and talk to an agent or broker who deals with life insurance. Given the high premiums relative to the coverage amounts, burial insurance does not make sense for everyone. But if short-term cash flow is likely to be an issue, you might want this kind of policy (for more advice on choosing a life insurance policy, see Before You Commit: Life Insurance 101).