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Burial Insurance: Do You Need It?

By Selena Maranjian - Updated Mar 7, 2017 at 2:33PM

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Burial insurance may be useful for some people, but it’s not the best option for many of us.

Source: smallbones, Wikimedia Commons.

Many kinds of insurance, such as health insurance and car insurance, can be critical to have. Others, such as flight insurance or life insurance for a child, are often not worth it. Burial insurance, though, may be useful for some people, but it's not the best option for many of us.

What exactly is burial insurance? It refers to a policy designed to cover death-related costs for someone, and it comes in several varieties and goes by several names besides burial insurance, such as "funeral insurance," "pre-need insurance," or "final expense insurance." While a life insurance policy might be for several hundred thousand dollars, or even several million, a funeral insurance policy is often just for $10,000 or $20,000 or so. (The proceeds can cover not only a funeral, but a cemetery plot, a casket, and some medical bills, as well.)

Let's review these kinds of coverage.

Burial insurance and final expense insurance
These kinds of policies can be term life policies or whole life policies and are bought directly from an insurance company, not through a funeral home.

They will generally cost less than pre-need insurance and will feature a beneficiary you name and not a funeral service provider. That's good, because it doesn't lock you into using a particular funeral home -- but it does present the risk that the named beneficiary might not spend the money as intended, such as on the deceased's funeral and death care. Some of these policies can get a bit fancy, with features of whole life insurance policies such as cash-value accumulation.  

Source: Steve Snodgrass, Flickr.

Pre-need funeral insurance
Pre-need funeral insurance is usually offered by a funeral home or a funeral service provider. It's often a whole-life policy connected to an underlying insurance company. A key trait of these policies is that they sometimes have the funeral service provider as the beneficiary. You pay your premiums, and then whenever you die, the provider takes care of the funeral.

That may seem fine, but it can be problematic if you move away and/or die elsewhere and can't use the benefit at another funeral home. These policies also often cost more than alternatives -- and sometimes even cost more  in premiums than you ultimately receive.

On the plus side, these policies generally pay out very soon after death, whereas regular life insurance policies sometimes take weeks.

Prepaying vs. prearranging
You may be encouraged by a funeral home or even a loved one to prepay for funeral arrangements. This, like a pre-need insurance policy, can be tricky when it's tied to a particular funeral service provider.

If you do opt to prepay, look for portability in the terms and be sure you know exactly what you're getting -- certain specified services, or a certain total dollar amount of services. Find out whether you're locking in current rates or if prices will rise over time. Be sure to alert your loved ones that you prepaid your own arrangements, too, and let them know where the paperwork is, too, lest they end up paying again.

It can make sense to skip prepaying, but it's often a good idea to pre-plan. Jot down your preferences and wishes related to your death. You'll want, of course, to take care of yourself legally and financially, with powers of attorney designated, an estate plan, a will, an advanced directive, and/or a living will. But go a few steps further and let your loved ones know whether you'd rather be cremated or buried, and whether you'd like an inexpensive, average, or fancy casket. If you don't tell them, they will have to guess, and they may spend more than you would have wanted. You can even prearrange your funeral more formally, with a funeral home that can store your preferences and choices for later use.

Other options
As you consider any of these products, remember that the main goal is to make some arrangements in advance to cover some end-of-life costs. This can be tackled in ways other than the options above. For example, you might simply plan to have a portion of your regular life insurance policy cover these costs instead of buying separate funeral insurance. Alternatively, you might set aside some savings on your own for death-related costs, with your spouse or children aware of and able to access the money.

Whether you sign up for any insurance or not, it's smart to think about it all now, ideally discussing your preferences and any decisions with your loved ones. Find out what their preferences are, too!

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