Life Insurance And Funeral Expenses: What's Covered?

Life insurance is a financial safety net that provides peace of mind for individuals and their loved ones. While it is an uncomfortable topic, planning for end-of-life expenses, such as funeral or burial costs, is essential to ensure that your family is not burdened financially during their time of grief. Life insurance policies can help cover these expenses, but it is important to understand the different types of insurance available and their limitations.

Burial insurance

There are generally three types of burial insurance: simplified issue, guaranteed issue, and pre-need insurance. Simplified issue plans involve the insurer evaluating your health based on a series of medical history questions, but without a medical exam. Certain factors, such as pre-existing conditions, smoking, or risky activities, may result in being denied a policy. Guaranteed issue plans do not require any medical questions or exams but are significantly more expensive. Pre-need insurance involves a contract with a funeral service provider, with the payout going directly to them rather than individual beneficiaries.

The beneficiary should contact the insurance company to begin the claims process as soon as possible following the death of the insured. They may be required to provide identification, a claims form, and a certified copy of the death certificate. It is important to note that life insurance payouts do not occur immediately and can take 30 to 60 days or longer, which can be challenging when making funeral arrangements as payment is often expected upfront.

Whole life insurance

The average cost of a yearly premium for a healthy 30-year-old can start at around $3,800 and range upwards. Some factors that would make a whole life insurance policy a good choice for you are:

• You can afford the higher premiums
• You want to leave money to your heirs
• You have a lifelong dependent, such as a child with a disability
• You want a policy that guarantees cash value

It is important to note that the process of receiving a payout from a life insurance policy is not immediate. Once a claim is filed, the insurance company will review the death certificate and investigate the request to determine the total benefit. This process can take anywhere from a few days to several weeks or even months. Therefore, it is essential to plan things out and have them set up in advance to ensure that the funds are available when your loved ones need them.

Additionally, the number of beneficiaries can affect the total distribution. As a result, the person paying the funeral costs might not be able to cover all the charges with their portion of the benefit. To address this, a beneficiary may be able to assign life insurance benefits to a funeral home to pay for funeral service charges. This option is known as policy assignment, and most funeral homes accept life insurance policies as a form of payment.

Another option to consider is advance funding companies, which offer policy beneficiaries an advance on their life insurance benefits. This can be helpful if the family needs money quickly to finalise funeral arrangements.

Universal life insurance

Flexibility

Investment Component

Tax Advantages

There are no tax implications for policyholders who borrow against the accumulated cash value of their universal life insurance policy. This feature can be advantageous if you need access to funds without incurring additional tax burdens. However, some withdrawals from the policy may be subject to taxes.

Policy Lapses and Large Payment Requirements

One potential drawback of universal life insurance is the risk of policy lapse or large payment requirements. If your cash value drops too low, you may need to make substantial payments to keep the policy active. Therefore, careful monitoring of the cash value is necessary to avoid this situation.

Comparison with Whole Life Insurance

Types of Universal Life Insurance

There are several types of universal life insurance policies, including indexed universal, variable universal, and guaranteed universal. Indexed universal life insurance ties your cash value growth to the stock market index, while variable universal life insurance allows you to invest your cash value in sub-accounts like stocks, bonds, and mutual funds. Guaranteed universal life insurance offers fixed premiums and death benefits at generally lower premium rates.

Pre-paying for a funeral

Funeral plans vary in terms of what they include. All plans include the services of a funeral director who takes care of the deceased, arranges the funeral, and organises transport. Some plans may also offer high-quality coffins, access to view the deceased in a chapel of rest, and limousines to transport guests to the funeral.

It's important to note that funeral plans never include the cost of flowers or organising a wake, but some plans allow you to put aside extra money to cover these costs. Burial funeral plans usually include the cost of digging the grave, but not the cost of the burial plot or extras like headstones. Cremation funeral plans don't usually cover disbursements in full but instead cover them by an allowance that rises with inflation.

When purchasing a funeral plan, you can choose to pay in a lump sum or in instalments. If you opt for instalments, you'll likely need to pay a minimum deposit upfront.

It's important to ensure that you know what your plan does and doesn't provide before you pay. Ask the plan provider questions about cancellation charges, included and excluded costs, and whether there could be any other expenses.

In the UK, funeral plans are not currently regulated, but the government has announced plans to bring them under regulation by the Financial Conduct Authority.

Using life insurance at time of death

If a loved one has passed away and they have an existing life insurance policy, this can be used to pay for their funeral services. A family member will need to bring the policy information when they meet with the funeral home, who will handle all the paperwork to claim the benefit on their behalf.

It's important to note that life insurance payouts don't occur immediately. Once a claim is filed, the insurance company will review the death certificate and investigate the request to determine the total benefit. This process can take anywhere from 30 to 60 days, and sometimes several weeks or months for more complicated policies.

To speed up the process, advance funding companies can offer policy beneficiaries an advance on their life insurance benefits. This can be helpful if the family needs money quickly to finalise funeral arrangements. During this process, the beneficiary files an assignment request with the advance funding company, which will then verify that the policy is valid and that there are no outstanding liens or other complications. Once the verification process is complete, the beneficiary will receive payment in just a few days and can pay any pending funeral bills without having to come out of pocket.

It's also worth noting that there is no guarantee that there will be sufficient funds to cover the funeral services, unless you know the current value of the policy. While life insurance can be used to pay for funeral services, it's not a pre-payment method. There are, however, ways to use a life insurance policy as a means of covering future funeral expenses, though there are drawbacks to this payment method.

One way is to make the funeral home the beneficiary of the policy. In this scenario, there is no actual money changing hands, and therefore, this does not constitute pre-payment for the funeral. However, if the policy has dividends, it will almost always result in a higher value than the increase in the cost of funeral services over the life of the policy. Even though the price can't be locked in without money changing hands, if you leave your dividends in the life insurance policy, it should cover the increase in cost over time (about 5% per year). In most cases, the future value of the policy will surpass the cost of the funeral services.

Frequently asked questions