Funeral Expenses: Life Insurance Payouts Explained

Life insurance is often used to cover funeral expenses, which can cost upwards of $10,000. While it won't cover pre-payment, life insurance can be used to pay for funeral services after death. The death benefit is usually paid out to a chosen beneficiary, who can then use the funds to cover funeral costs. However, it's important to note that life insurance payouts don't happen immediately and can take up to several months. There are also different types of life insurance policies, such as whole life insurance, universal life insurance, and burial insurance, each with its own advantages and disadvantages.

The pros and cons of burial insurance

Burial insurance is a type of life insurance policy that can be used to cover funeral expenses and is sometimes called funeral insurance or final expense insurance. It is typically a whole life insurance policy with a small death benefit, ranging from $5,000 to $25,000, meant to take care of final expenses and funeral costs.

Pros

• It is easier to qualify for burial insurance than most life insurance plans.
• There are few, if any, health questions to answer, and no medical exam is needed.
• Burial insurance accumulates cash value that can be used while the policy is active.
• It offers guaranteed coverage.
• It helps loved ones take care of final expenses.
• It does not require an application with a medical exam.

Cons

• Burial insurance has a lower benefit than most life insurance plans.
• Since there are no health questions, the insured won't get a discount for being in good health.
• Rates for burial insurance are slightly higher.
• The amount paid in premiums may be more than the funeral cost.
• There are usually little to no extra funds after funeral expenses have been paid.
• The policy may lapse if the insured stops paying premiums.
• The insured may end up paying more in premiums than the policy will pay out.
• Burial insurance has higher premiums and poorer benefits for plans that don't require an exam or questions, like guaranteed issue policies.
• It offers a smaller death benefit than traditional life insurance.
• There is a graded death benefit if the insured dies within 2 to 3 years of taking out the policy.

Pre-need funeral insurance

When you buy a pre-need plan from a funeral home, you choose the funeral home you want to work with and specify the arrangements you desire. The funeral home then prices it out and you can pay the cost upfront or over time. The cost of your desired funeral may increase over time, and whether your family will have to pay the difference depends on whether the services are guaranteed or non-guaranteed. For guaranteed services, the funeral home covers the difference, whereas for non-guaranteed services, your family may be responsible for the difference.

One downside of pre-need funeral insurance is that it can be expensive, and the money you pay will be earning interest for the insurance company rather than for you. If you live a long life after purchasing the insurance, you may have lost out on potential investment gains. Pre-need plans are often non-refundable and non-transferable, and they may have hidden fees that your survivors will have to pay.

Whole life insurance

A portion of the premium you pay will be set aside to be invested into a cash account to grow in value. In a whole life policy, your cash value grows at a set rate, making this type of policy a very safe and steady choice. The cash benefit from final expense insurance can be used to cover funeral and burial costs, medical needs, or anything else that will help loved ones.

When a loved one dies, a family member simply needs to bring the policy information to the funeral home, which will handle all the paperwork to claim the benefit on their behalf. To receive a payout from a life insurance policy, the beneficiary must send a claim to the insurance company carrying the policy. They will need to submit an official death certificate and provide basic information about the deceased and the cause of death. Most companies will have a claim form available to fill out.

After the company receives the claim, it usually takes a few days to a few weeks to process. Once it is processed, the death benefit can be paid out in a lump sum or multiple payments. Often, there will be an option to put the amount in an interest-accruing account.

Universal life insurance

One key feature of universal life insurance is its adjustability. The death benefit and premium can be modified at any time to align with changes in the policyholder's life. This adaptability makes it a more flexible option compared to other types of life insurance. Additionally, a portion of the premium paid goes into a cash account that grows at the market rate. This cash value component can be borrowed against or withdrawn without reducing the death benefit under certain circumstances.

However, universal life insurance policies do require careful monitoring. The growth of the cash account is linked to the current interest rate, and fees associated with these policies can accumulate and deplete the account over time. There are three common types of universal life insurance policies: indexed universal, variable universal, and guaranteed universal. Indexed universal policies tie the cash value growth to the performance of the stock market index, while variable universal policies allow investment of the cash value in stocks, bonds, and mutual funds. Guaranteed universal policies, on the other hand, offer fixed death benefits and premiums, typically at lower rates due to their limited or non-existent cash value.

When considering universal life insurance for funeral expenses, it's important to weigh the benefits against potential drawbacks. While the flexibility of adjusting the death benefit and premium is advantageous, the impact of interest rates and fees on the cash value needs careful attention. It's also essential to remember that life insurance payouts may take time, and funeral homes often require upfront payment. Therefore, having a clear understanding of the policy and communicating expectations to loved ones are crucial steps in planning for funeral expenses.

How to receive a life insurance payout

The death of a loved one is a difficult time, and the last thing you want to worry about is money. Life insurance can help ease the financial burden, but it's important to understand how it works. Here's a step-by-step guide on how to receive a life insurance payout:

Step 1: Understand the Process

Know that life insurance payouts don't happen immediately. Once a claim is filed, the insurance company will review the death certificate and investigate the request, which can take time. It's also important to ensure that the policy is active and there were no payment lapses, as this could render the policy invalid.

Step 2: File a Claim

To receive a life insurance payout, a beneficiary must file a claim with the insurance company. You'll need the insurance company's name, and they can look up the policy and verify your status as a beneficiary. Fill out a claim form and provide a certified copy of the death certificate. If you're unsure whether your loved one had a life insurance policy, check bank statements for payments to an insurance company.

Step 3: Choose a Payout Option

There are several options for receiving a life insurance payout:

• Lump-sum payout: This is the most common option, as it gives beneficiaries full control over the money. However, receiving a large sum can be overwhelming, and you'll need to manage it wisely.
• Retained asset account: The insurance company holds the payout in an interest-bearing account, and you can access it with a checkbook. The interest earned is taxable.
• Annuity: The payout is converted into guaranteed payments for life, which can be helpful if you need the money for monthly living expenses. However, there may be fees and surrender charges.
• Life income with period certain: This option ensures that payments continue to be made for a certain period, even if the beneficiary dies. The payments are lower to compensate for the guaranteed payout period.
• Specific income payout: This option allows you to receive the payout in installments over a chosen period. It provides more flexibility than a traditional life income option, but any interest earned is taxable.

Step 4: Seek Professional Advice

Consider working with a certified financial planner or advisor to make the most of your life insurance payout. They can help you build a personalized strategy based on your current expenses, investments, and savings for the future. This is especially important if you receive a large sum, as it can be challenging to manage wisely.

Step 5: Be Mindful of Taxes

While life insurance payouts are generally not taxable, there are instances where taxes may apply. For example, if you choose an annuity or retained asset account, the interest earned on these accounts is typically taxable. Consult with a financial professional to understand any tax implications.

Receiving a life insurance payout can be a complex process, and it's important to make informed decisions. Take your time, seek professional advice, and consider your short-term and long-term financial needs to ensure the payout is used effectively.

Frequently asked questions