What are Differences between Burial Insurance, Pre-Need Insurance and a Funeral Trusts?
Elsewhere on our website you can find detailed information of each of these options, all of which are excellent ways to fund a funeral. The most important thing to remember is they all have specific advantages and disadvantages based on your specific situation. First, let’s do a quick overview of each option:
What is Burial Insurance?
Burial insurance is a term coined by the life insurance industry which represents a variety of low face amount life insurance policies designed to cover the costs of an individual’s burial, such as the cost of their funeral and other outstanding bills. Final expense is also commonly referred to as funeral expense insurance.
Final expense insurance is a lower cost alternative to traditional pre-need plans as you can finance the life insurance premiums over many years, keeping your monthly costs to a minimum.
The beneficiary in this scenario is usually a family member or executor of your estate. Funeral homes should not be listed as the beneficiary on a final expense policy.
Here is a full review of burial insurance.
What is Pre-Need Insurance?
A pre-need policy is sold by funeral home directors, who are also licensed to sell life insurance.
Pre-need insurance, is intended for the person who has selected specific arrangements at a funeral home and wants the assurance that those arrangements will be paid for and implemented at a predetermined price based on the general price list.
The beneficiary of this type of policy is the funeral home, and the funeral director receives a commission, like any insurance agent.
Pre-need insurance is the most common funding method sold in funeral homes because it not only locks in the price of the funeral but also counts as an asset toward the future value of the funeral home.
What is a Funeral Trust?
A funeral trust is a contract you with a provider of funeral or burial services.
Under this arrangement, your payment for funeral arrangements is deposited into a federally insured bank until your death. Depending on your state, your money may be put into an individual trust account or a “master” trust, which pools many individual trusts.
The value of the trust can rise and fall depending on the investment performance.
However, if you have a guaranteed-price contract from your funeral home, the funeral home takes on the market risk from the trust and must provide the services you selected no matter how the trust’s investments have performed.
Funeral trusts are usually the solution when you are considering paying for the future funeral in full.
If the trust is irrevocable, that means those funds can only be used at that specific funeral home. And, the value of the trust is considered an asset to the funeral home for future sales. This is another common incentive for funeral homes to guide you towards funeral trust accounts vs. other funding methods.
Which One is Right for You?
The right answer to that question is “it depends on your situation.”
With all the various funeral funding solutions it can be confusing which route to choose. Most people today don’t want to leave the burden of their funeral expenses for their children or family to have to pay when the time comes. Below are a few considerations when choosing your funding methods:
- Flexibility is the primary advantage life insurance in general and final expense insurance specifically have over either pre-need insurance or a funeral trust. With Final Expense, you are purchasing a small life insurance policy, typically up to $25,000. These policies are underwritten just like any typical life insurance. There are no restrictions from the insurance company on how the proceeds can be used upon your death. And, they are often the most affordable way to pay for your funeral.
- With a Funeral Trust, you may be able to increase the likelihood of becoming eligible for long-term care benefits available through Medicaid. Also, funding your trust with life insurance allows that the trust will have no taxable income to report since life insurance cash values grow tax deferred. Be sure to discuss with a financial planner or other professional advisor whether a Revocable or Irrevocable trust is best for you.
- With a pre-need funeral plan from a funeral home, you are guaranteed that your funeral expenses will be paid at the level of plan you purchased. Some funeral homes will allow you to lock in the cost of your funeral no matter how far in the future it occurs. The pre-need contract is with a specific funeral home and there may be substantial financial penalties for terminating the contract or transferring it to another funeral home. You may not have the flexibility of changing your wishes without losing the price guarantee. Read the contract carefully.
Make sure and take the time to explore each and weigh the pros and cons to your specific situation.