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Life Insurance Policy vs. Prepaid Funeral Services

Like so many things in life, funeral costs are rising. Preparing for your funeral is prudent and practical.

As responsible adults, we should set up a plan for paying for our own funeral. You may reduce some of the stress and burdens for your survivors, your family, and loved ones.

The most popular form of payment for a funeral is life insurance. Directors of funeral homes are accustomed to dealing with life insurance benefits covering funeral costs.

Prepaid funeral contracts are also available. It seems like a logical choice in some ways. However, there can be risks or hidden costs that make this route one carefully chosen. This article will address the differences and advantages of securing a life insurance policy to pay for your funeral versus a prepaid funeral contract.

What is a Life Insurance Policy?

Life insurance is a contract between a policyholder and an insurance company, where the insurer promises to pay a fixed sum of money in exchange for a premium, upon the death of the insured.
Payments must be made with no lapse in the policy. Consult your insurance agent about the details of your insurance policy. Typically, upon the death of the insured, the beneficiary presents a certificate of death to the insurance company and the funds are disbursed.

What is a Prepaid Funeral Contract? 

A prepaid funeral contract is an arrangement between you and the funeral home pursuant to which you make an upfront payment to the funeral home in exchange for an agreement to the funeral home will administer and cover the costs of your funeral in the future upon your death.

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There are many scams targeted to mature individuals regarding prepaid funeral plans. If you decide to go with a plan, do your research.

Benefits of an Insurance Policy

Depending on whether you have chosen whole life, universal, or term life insurance, a life insurance plan covers other advantages. A life insurance product is a financial asset.

A life insurance policy may include accelerated death benefits. An accelerated death benefit allows the insured to reap the benefit of the policy before the insured’s death, usually due to terminal illness.

A Preplanned Funeral Contract

A person decides where they want to be buried or cremated. They prepay for the all funeral arrangements.

You meet with the funeral director and scope out the costs and the type of service you want. It’s all recorded and the costs tallied into a contract. The downside of this contract is you cannot move it to another funeral home. You are fixed into the location.  And if the funeral home closes, you may be losing your money completely.

Here are some questions to ask and consider if you are leaning toward a prepaid plan:

1. What happens if a funeral home is closed?

It depends on the state and the reason for closure. State laws require that the prepaid plans are secured with an independent entity: an insurance provider or a trust.1  Many scams are targeted to mature individuals regarding prepaid funeral plans. If you decide to go with a plan, do your research. 2

If they declare bankruptcy, the chances of getting your money back may be slim, and if you do receive any money, it will be a fraction of what you paid. 3

2. Do you get a refund if you cancel a prepaid funeral contract?

Usually only within the first seven days of purchase. A revocable contract may allow for a cancellation. There also may be administration costs you cannot recur. If the contract has been set up through a revocable trust, your money may be returned. 2

3. Can a prepaid funeral contract be transferred to another funeral provider?

No. Funeral contracts are fixed to the funeral provider and place you have chosen.

4. Can the payments total more than the price of the prepaid funeral contract?

If you have a non-guaranteed plan, yes. Your family may be stuck paying more money at the time of the funeral and the funeral home may refuse to conduct the funeral until you come up with the difference.

If you look at the amount of money you are spending (an average of $10,000.00), the money might well be spent on an insurance policy that is designated for funeral costs. A prepaid plan is not an investment versus life insurance. It is an expense.

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Is there a difference in what type of life insurance pays for funeral costs?

Life insurance is an insured policy that pays benefits upon the death of the policy holder. A particular life insurance that is created for covering funeral costs is a Final Expense Insurance. It is a life insurance that is usually priced with a more affordable plan to specifically cover funeral costs.

A final expense life insurance policy has the same benefits other life insurance policies do. You choose the beneficiary or beneficiaries, and they choose how the money is spent.

How you want your funeral conducted is easily created through different channels. You can confer with a funeral director and find out the precise details, outlining your funeral need and service. Many funeral websites have information and guides that outline what goes into planning the service.

  • Write your wishes and details down, informing your beneficiary of your funeral plans.
  • Create a trust and detail the information for funeral costs and details assigned to the trustee to carry out upon your death.
  • Set up a specific funeral home as a beneficiary with a specific amount of money designated for the funeral arrangements.
  • Earmark a smaller insurance plan for the costs of the funeral.

Life is unpredictable. Planning for what you can control is important. When it comes to your own funeral planning and costs, there are options that can safeguard you and your family. Choose wisely.

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