Guide to Burial Insurance For Your Final Expenses
It’s a Final Expense Insurance Policy
Here you’ll find the information you need when considering burial insurance. Often confused with final expense insurance, it’s actually the same type of policy. We’ll explain what burial insurance is, how it works, and the advantages and disadvantages of burial / final expense insurance policies.
What is Burial Insurance?
Burial insurance is a permanent life insurance policy that is designed to cover the cost of your funeral and other “final expenses.” It is commonly referred to as final expense insurance and funeral insurance. When we think of end-of-life expenses we think of funeral costs, but there may also be medical bills, legal fees, housing costs, and other remaining bills. A smart shopper considers all of these final expenses when deciding how much insurance they will need.
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How does Burial Insurance Work?
To understand how burial insurance works, we need to compare it to other types of life insurance. Any type of life insurance can be used to pay for your funeral expenses. For most of us the main purpose of life insurance is to provide financial security for our survivors. It can partially replace the income lost due to your death and provide an inheritance for your heirs. Burial insurance is specifically designed to cover our final expenses.
True burial insurance is a permanent whole-life policy. It differs from “regular” whole-life policies because it is issued in lower face amounts – between $1,000 to $25,000 and, in some cases, as much as $50,000. Due to the lower face amounts, it is easier to qualify for a burial insurance policy. Most importantly, it will be available until the insured dies, provided the premiums are paid in full. Obviously, the policy needs to be enforce at the time of death so the benefit can be claimed and your final expenses paid.
Typical characteristics of burial / final expense insurance policies are:
- Face amounts between $1,000 to $25,000
- Simplified or guaranteed issue (more on this below)
- Coverage for the life of the insured (may be limited to 100 years old or more)
- Accumulates cash values (typically)
- It is not linked to a prearranged funeral contract.
Burial Insurance vs Term Insurance
Term life insurance policies are not ideal to cover final expenses because they terminate at a certain point in time – either at a specific age (For example, 70, 75, or 80 years old) or after a specific number of years (Example: 10, 15 or 30 years). As a result, a term life policy may terminate before the end of your life.
You might want burial insurance as supplemental coverage so that the proceeds from your main life insurance policy are not depleted by your final expenses. But if you are concerned about cost, burial insurance is more affordable than regular life insurance.
Burial Insurance vs Preneed Insurance
Preneed insurance is another commonly used term but that is a different type of funeral coverage. Preneed insurance is tied to a prearranged contract for funeral goods and services. These contracts with a funeral home or other funeral provider are created in advance. Burial insurance is not linked to a prearranged funeral contract.
How Do I Apply For Burial Insurance?
Applications for burial insurance policies fall into two basic categories.
Simplified issue policies. Burial insurance policies are usually issued on a “simplified” basis. “Simplified” means that medical exams are generally not required to obtain coverage, although the applicant will have to answer certain medical questions. The insurance company may rely on other information, such as Medical Information Bureau (MIB) reports when reviewing applications. Applications may be declined due to pre-existing conditions and a history of smoking.
Guaranteed issue policies. A Guaranteed Issue policy will generally be issued without the need to answer any medical questions. They are typically limited to $25,000 of coverage and to ages such as 40 to 80. Many Guaranteed Issue policies do not distinguish between smokers and non-smokers, whereas Simplified Issue policies usually do. Look for a guaranteed issue policy if you have health issues or do not want to answer any health questions.
How are Death Benefits Paid?
The payment of death benefits depends on whether it is a Level Policy or a Modified Policy.
Level Benefit Policies
A Level Benefit Policy will pay the full death benefit from Day One (the issue date of the policy), regardless if the death is due to natural causes or an accident. In this case, the death benefit is the face amount of the policy. The approval of a Level Benefit Policy will depend on the applicant’s answers to the medical questions. Unfavorable answers to certain medical questions may not disqualify the application but may require high premiums and/or limit the amount of coverage that will be approved. Most level policies are available from age 18 to 80 or 85.
Modified Benefit Policies and Restriction Periods
A Modified Policy pays a reduced death benefit during the “restriction period” (typically 1 or 2 years) for deaths due to natural causes. Generally, an accidental death during the restriction period will qualify for the full death benefit regardless of when the death occurs. Modified Policies are issued when there are some adverse medical considerations and the insurance company wants to limit its exposure during the first year or two of the policy. Modified policies may be Simplified Issues or Guaranteed Issues.
Graded Benefit Terminology
The terminology used by insurance companies for their Modified Benefit Policies can get confusing. They may be called Graded Benefit Policies because the benefit is reduced by set percentages during the restriction period. For example, let’s assume we have a Graded Benefit Policy that pays 30/70/100. Therefore, it will pay 100% of the face amount if the death is accidental, starting when the policy is issued. But if the death occurs by natural causes, the death benefit is reduced to 30% of the face amount in the first policy year, 70% of the face amount within the second year, and 100% thereafter.
Return of Premium Another Form of Modified Benefit
Similarly, Return of Premium (ROP) Policies provide a simple return of the cumulative premiums paid to date plus some predetermined interest rate if the death occurs during the restricted period (e.g., in the first 2 or 3 years). For example, let’s assume we have a ROP policy that is 10% simple, 24-month ROP. Like the Graded Benefit Policy example, it will pay 100% of the face amount if the death is accidental starting when the policy is issued. But if the death occurs by natural causes within the first two policy years, it pays only the cumulative premiums with a simple compounding of 10% interest.
Be sure to check the details of the policy because some insurance companies may simply call it a “Graded Policy” when it has a Return of Premium provision. ROP Policies are typically easier to qualify for because they are only returning premiums if death occurs in the first 2 or 3 years, whereas, a true Graded Benefit Policy is paying a percentage of the face amount during the restricted period.
Who can be a beneficiary of my burial insurance policy?
You can name any individual or individual as the beneficiary of your policy. However, there are legal considerations when naming a Trust as owner or beneficiary and naming minor children or their guardians as beneficiaries. In these cases, it’s best to seek the advice of a qualified estate-planning attorney.
Where do I buy burial insurance?
Most insurance policies are purchased through licensed insurance agents. The type of agent you are dealing with will affect the insurance options that they present to you. The types of insurance agents that you may encounter include:
Independent Agents – these agents sell the products of several insurance companies. Therefore, they can present you with the most options. Independent agents represent their clients so they can search the market on your behalf. They earn commissions on the policies they sell.
Exclusive or Captive Agents – these agents represent only one insurance company. They earn commissions on the policies they sell.
Direct-writing Agents – these agents sell from an insurance company’s office. They may be paid a salary by the insurance company rather than commissions.
Also, policies may be sold directly to the public by the insurance company through direct mail or advertisements in print publications and on the Internet. There is no agent involved in these “direct response” sales.
How Do I Find Low-Cost Burial Insurance?
Your age, health, and amount of coverage needed to determine the cost of a burial insurance policy. Rates for women are typically a little less than for men. For example, a $5,000 guaranteed issue policy for a 65-year-old female will be around $30 per month, whereas the same policy for a male might be $37 per month. Depending on your medical history, an underwritten policy would most likely be less. These are estimates to give you an idea of the costs. Multiply these figures by 2 to estimate a $10,000 policy, multiply by 3 for a $15,000 policy, and so on.
How Do I Shop For Burial Insurance?
We recommend the following steps when considering and buying burial insurance:
- Estimate your final expenses.
- Determine how much money you will leave behind.
- Decide if you really need burial insurance.
- Decide on the type of policy to buy.
- Request a quote.
- Determine if you can afford the coverage you want.
- Pick a burial insurance provider.
For details on how to go about these steps, see our article on funeral insurance.
How do I file a death benefit claim?
The payment of death claims is subject to a review by the insurance company. A claim form must be completed and filed by the named beneficiary(s), along with providing a certified death certificate. The insurance company may also request the original policy, so it’s a good idea to let your beneficiaries know where the policy is located. The death benefit proceeds are not taxable, however, any interest paid is subject to federal and state taxation and thus the named beneficiary(s) may also have to fill out IRS Form W-9.
When purchasing a burial insurance policy, be aware that all life insurance policies contain a contestability clause. This gives Insurance companies the right to examine and contest claims within certain periods, usually two years. If death occurs within two years of the application or reinstatement date, the insurance company has the right to conduct a review to confirm that there was no material misrepresentation on the application that would have caused it to decline the issue or reinstatement of the policy. The clause also protects insurance companies from financial losses due to fraudulent claims.
Even beyond two years, insurance companies can still take legal action if fraud comes to light. Be sure to fully disclose all requested information accurately on an insurance application. When an insurance company exercises this right to contest the claim, a HIPAA-compliant authorization to disclose medical information will be required in addition to the claim form and the certified original death certificate.
When will the death benefit be paid out?
Insurance companies usually pay out death claims within 24 hours after claim approval. However, a claim during the contestability period is likely to be more complex and could take quite a while. This could be a problem because funeral homes, cemeteries, and other funeral service providers expect to receive payment in full at the time of the funeral. While checks and credit cards are the typical forms of payment, some funeral providers will accept the assignment of life insurance proceeds. A funeral provider assignment is a written agreement between a beneficiary and a funeral provider authorizing the insurance company to direct payment of some or all of the policy proceeds to the funeral provider. The insurance company may honor the assignment and pay the funeral provider before the claim is settled in full.
