Prepaid Funeral Plans vs. Funeral Insurance vs. Life Insurance

Losing a loved one is almost always difficult. Grief can bring unexpected feelings, and funeral or cremation considerations often include complicated financial decisions. By paying for your funeral in advance, you spare your family some of this stress, relieving them of financial burdens and giving them the confidence of knowing how you want to be remembered.

There are a number of ways to fund a funeral in advance—a prepaid funeral plan, funeral insurance and life insurance—but to decide what’s best for you, you have to know the differences.

In this article, you will learn:

• What is the average cost of a prepaid funeral?
• What is a revocable trust?
• What is an irrevocable trust?
• What is burial insurance?
• What is a term life policy?
• What is a whole life policy?
• Does an insurance policy expire?
• What is a payable-on-death account?

Prepaid funeral plans

A prepaid funeral plan allows you to outline your funeral or cremation, choose the products and services you'd like to include, specify the details, and then pay for the arrangements over time in installments that fit your budget.

You may choose the following and more:

• Burial or cremation
• Casket or urn
• Traditional service or celebration of life
• Location
• Music
• Flowers
• Catering
• Decor
• Stationery
• Keepsakes

When you plan end-of-life details in advance, you provide peace of mind for yourself and your family. Your loved ones won't need to chose a funeral home, plan a service, or worry about how to pay for your funeral, cremation, memorial or celebration of life.

Read 6 Reasons Prepaid Funeral Plans Are the Best Gift You Can Give Your Children.

What is the average cost of a prepaid funeral?

According to the National Funeral Directors Association, the national median cost of a burial with funeral and viewing in 2019 was $7,640 (not including cemetery costs).

The national median cost of cremation with funeral and viewing in 2019 was $5,150 (add in a cremation casket and urn and the total cost was $6,645).

With a prepaid funeral plan, you get to choose the type of service you want and lock in today's prices, which protects you against rising costs and inflation. Once you decide on the details of the plan and sign a contract, the funeral home establishes an insurance policy or trust account (revocable or irrevocable) on your behalf, which secures your monthly payments. As with any big purchase, your payments continue until the balance on your plan is paid off. Terms are usually three to 10 years, which allows you to have a monthly payment that works with your budget.

What is a revocable trust?

A revocable trust allows you to make changes to the trustee or beneficiary at any time. You can also cash out or cancel a revocable trust whenever you'd like.

What is an irrevocable trust?

An irrevocable trust cannot be canceled, it has no cash value, and the money in the trust cannot be removed. You cannot make changes to the trustee or beneficiary or dissolve an irrevocable trust without the permission of the trustee. Families usually designate a trust as irrevocable only as a state requirement for Medicare or Medicaid assistance.

Funeral insurance

Few people want to think about the details of their funeral or cremation. Not everyone is inclined to choose a casket or urn, determine the songs they'd like played or the food they'd like served, or decide on a final resting place. But even if you're not up for detailed planning, you can still ensure your family won’t be faced with burdensome funeral costs by purchasing funeral insurance.

What is burial insurance?

Burial insurance is another name for funeral insurance, which is also called final expense insurance. These policies work like regular life insurance in that you pay monthly premiums and when you die, your beneficiary receives a payout designated for end-of-life expenses.

Unlike a traditional life insurance policy, which requires a medical exam to determine the cost of the policy, burial insurance doesn't require an exam, and applicants are often insured after answering only a few questions.

There are two main types of burial insurance:

Final expense insurance: pays a flat amount—typically $5,000-$25,000, depending on the plan you select—to your chosen beneficiary to use to settle your final expenses. As long as you continue to pay the premiums, the insurance remains in effect until you die, when your beneficiary gets the benefit. The benefit can be used for funeral and burial costs, as well as medical bills, credit card debt and other expenses. The beneficiary decides how the money is spent, and there is no protection against inflation. In addition, your family may have to front the money for funeral expenses and wait for the policy to pay later.

Pre-need insurance: covers only the expenses associated with a pre-planned funeral, cremation or burial. The benefit is paid directly to the funeral home chosen by the policy holder. This insurance does protect against inflation, because funeral costs are locked in at current prices. Pre-need insurance premiums are paid only for a set amount of time. Dignity Memorial® providers offer pre-need insurance through American Memorial Life Insurance.

Read more about pre-need and funeral insurance.

Life insurance

Life insurance differs from prepaid funeral plans and funeral insurance in that the funds paid to beneficiaries are intended to replace lost income. Money can be used to pay for a funeral, though generally that's not why people buy life insurance, and there are downsides to this strategy.

For one, your family will have to pay for all funeral expenses at the time of the service and wait on the insurance policy to pay out—which can take weeks or months. Such a delay can cause financial hardship, frustration and stress during an already difficult time.

Life insurance is generally divided into two types: term life and whole life.

What is a term life policy?

Term life insurance provides coverage for a specific period of time or "term.” If the insured dies during the term, and the policy is active/the premiums are up to date, a death benefit is paid to the beneficiaries.

Less expensive than whole life insurance, term life insurance has no cash value. The only value is the guaranteed death benefit.

What is a whole life policy?

Whole life insurance is income replacement. It helps the deceased's family maintain a standard of living. As long as the premiums are paid, it pays out after you die.

Premiums are typically higher than for term life insurance, while the fixed payout amounts are usually lower. Additionally, whole life insurance premiums establish a cash value that the policyholder may borrow against.

Health conditions can prevent older people from qualifying for whole life insurance.

Does a funeral insurance policy expire?

One of the differences between whole life and term life is that the latter does expire. With whole life insurance, as long as you pay your premiums on time, the policy stays in effect for a lifetime (in other words, your whole life).

Since term life insurance is by definition only for an established period of time, if you die before the expiration of the term, your beneficiary gets a cash payout. However, if the term expires before your death, there is no payout.

In both cases, if you stop paying the monthly premiums, the insurance policy can be canceled.

Payable-on-death account or Totten trust

Another way to fund your funeral is through a bank account that a beneficiary can access only after your death. This is called a payable-on-death account, POD or Totten trust, after a court case establishing these types of accounts.

Funds from the POD can be distributed before a will is probated and used to pay for a funeral. However, the bank or investment company may require a death certificate before releasing funds to your beneficiary—and getting that can take as long as a month. Since most funeral homes require payment at the time of service, money from a POD account usually isn't immediately available. In that case, your family will need to pay the funeral home another way and then pay themselves back later.

Get started now

People may have differing opinions on the best way to prepay for funeral expenses, but most agree that planning in advance is well worth the effort. Our free Personal Planning Guide will help you get started. The guide allows you to record your final wishes and the details of your family heritage, military history, estate information and more into a single document to share with your family. Request your Personal Planning Guide now.