Funeral Insurance
Purchasing a life insurance policy to fund your pre-planned funeral expenses is a popular alternative to a funeral trust with certain additional benefits. Funeral insurance offers protection against inflation, tax advantages, and the flexibility to choose any funeral home or cemetery. Specially tailored funeral insurance policies are available from various companies. These policies can be purchased from funeral service providers and their agents, as well as through insurance agents.
As is the case with trusts, funeral insurance policies designate a specific funeral service provider as the primary beneficiary. Your pre-need contract should specify who receives any benefits in excess of the funeral cost, as well as who is responsible for any deficiency. An alternative type of funeral insurance, known as "final expense" coverage, is not linked to a specific funeral service provider. The death benefit on a final expense policy can be paid directly to your estate. Funeral insurance laws also vary by state.
Its important to note the differences between funeral insurance and regular life insurance policies, such as term life insurance. Term life insurance stays in force as long as you are paying your premiums. Once you stop making premium payments, the policy lapses and the coverage ends. If you want to use a term life policy to cover your funeral costs, you must keep the policy in force until you die. And of course, the premiums typically increase as you get older.
Unlike term life, funeral insurance premiums are paid either in an initial lump sum amount or under 3-year, 5-year or 10-year payment plans. Once you have paid the premiums in full, the funeral insurance policy remains in force until you die. Also, the policy benefit amount grows over time at a rate set by the insurance company to offset increases in funeral costs due to inflation.
Whereas interest income on trust accounts is taxable, the growth in death benefits on a funeral insurance policy are not subject to income tax. In addition, funeral insurance is not considered a personal asset so it does not affect your ability to qualify for assistance from social service programs, such as Medicaid.
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