As you are aware, final expense insurance is more expensive and provides less coverage with a higher premium than traditional life insurance that is fully underwritten. Our company only offers insurance policies with accelerated underwriting that can be used to fund final expenses. However, there are four alternatives you can choose to fund final expenses that may be more beneficial, but all decisions have their pros and cons.
The first alternative is a personal savings account. You create a budget and put your own funding aside once you coordinate with your funeral director the exact costs of your funeral plans. However, most people do not plan for their funeral or know the costs. They leave it up to someone else after their death to plan, usually unwarranted, which is why having final expense insurance is more beneficial. Funeral expenses are not something you should wait until your retirement years to decide how they will be paid. This is because you need time to plan and save for these expenses. Also, you do not want to tap into your retirement savings to save for these expenses. A life insurance policy such as final expense insurance is more suitable to cover these expenses. With proper research, you will find that the average cost of a funeral is $7,000 to $8,000.
The second alternative is temporary life insurance that is fully underwritten. Financially speaking, this is the cheapest option and the most cost-effective way to insure yourself when shopping for life insurance. As a matter of fact, this type of life insurance should be your first consideration. Thereafter, a permanent life insurance policy that is fully underwritten should be your second consideration. This is because permanent life insurance is more expensive than temporary life insurance. This is due to the policy protecting you for your entire life, in addition to, the added benefit of a savings account attached to the policy. With a temporary life insurance policy, the lower the term, the lower the premium. Moreover, the maximum term limit is normally 30 years. Furthermore, a fully underwritten temporary or permanent policy can take a few to several weeks to be issued after application, and is only beneficial if you are in good to excellent health, whereas as an accelerated underwritten temporary or permanent policy can take a few days and you can be in poor to excellent health. However, the quicker the underwriting process, the more expensive the policy.
The third alternative is pre-need insurance. Pre-need insurance is a special type of permanent life insurance policy without a savings account component. This special type of insurance policy may be offered by a funeral home. As your funeral costs would be predetermined before your death, these costs are to be prepaid to the funeral home so you know your funeral plans will take effect. With this type of insurance, you do not need a designated beneficiary to make an upfront payment before an insurance policy pays out after your death. In this case, the funeral home will have their upfront payment well in advance of your death. However, a prepayment means you are paying upfront and early before your death. This means your money will no longer be available to spend and the funeral director can earn interest off of these funds long before your death while you could have saved and invested this money yourself to fund these expenses at the time they were required to be paid. Also, this type of insurance does not provide a death benefit. Therefore, there are no funds available for income replacement to a loved one or dependent unless you leave a personal trust behind for them. Lastly, a funeral home can change ownership. The new owners are not liable to return your prepayment. If you are not happy with the new ownership, you would essentially have to replan and repay your funeral with another funeral home.
The fourth and final alternative is a pre-need funeral trust. A pre-need funeral trust is similar to pre-need insurance, except it is a trust account. With a trust account, you make contributions and these contributions accrue interest much like a savings account accumulates cash value. However, a pre-need funeral trust is an irrevocable trust. This means, once issued, changes to the trust are difficult to make. Also, accrued interest is normally taxable.