How to Pay for a Funeral with Life Insurance (Complete Guide)

Of course you would rather not spend time thinking about the end of your life, especially while you're still living it. Still, we all know that it is responsible, and easier for our families, if we can decide what we want for our funeral or end of life celebration; including how to pay for it. Even if you are leaving behind an inheritance, that money will not be immediately available to your relatives and most funeral homes require payment up front for any funeral services including burial and cremation(https://www.lhlic.com). This is why insurance is a sensible option.

Can Life Insurance Pay for a Funeral?

Yes. Depending on the terms of the policy and how it is set up, most life insurance policies can cover the cost of a funeral. For the funds to be available when your loved ones will need them, it is important to plan things out and have them set up in advance. It will also help to have a clear understanding of how your policy works, so you can communicate with your loved ones about what they can expect.

Why Use Life Insurance to Pay?

Funerals are expensive and can cost up to $10,000 or more (https://www.policygenius.com). Having a plan set up in place ahead of time with your life insurance company can save your loved ones from having to stress out about how they are going to pay while in the midst of grief and loss.

Different Types of Life Insurance That Cover Funerals

Whole Life Insurance

This type of policy is a permanent life insurance policy. That means it covers you for your whole life and pays out to your beneficiaries regardless of when you die. The premiums are more expensive, but are guaranteed to stay the same throughout the policy. Often a portion of the premium you pay will be set aside to be invested into a cash account to grow in value (https://www.nerdwallet.com). In a whole life policy your cash value grows at a set rate making this type of policy a very safe and steady choice.

According to https://www.fbfs.com, there are many factors that go into deciding how much your premium will be:

Age
Gender
Health
Family History
Smoker vs Nonsmoker
Occupation
Lifestyle
Benefits offered by policy

The average cost of a yearly premium for a healthy 30 year old can start around $3800 and range upwards. Here are some factors that would make a whole life insurance policy a good choice for you:

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

Term Life Insurance

This policy will cover you for a chosen period of time, 20 or 30 years for example. This policy does not build any cash value and so the premiums tend to be cheaper. Depending on the above mentioned factors, as well as the length and payout of the policy, the average yearly cost can range from $132 - $1632. This policy is a good choice for you if you:

Only need short term coverage (For example until your kid becomes an adult)
Are on a tight budget
Don’t want to use life insurance as an investment tool

The drawback on this policy is that if you outlive the policy there will be no payout to help with funeral expenses.

Universal Life Insurance

This is another type of permanent life insurance. A universal plan offers more flexibility than whole life insurance. The death benefit and premium can be adjusted at any time according to changes in your life. A portion of your premium goes into a cash account to be grown at market rate. This can be borrowed against and at certain points withdrawn from without decreasing the death benefit.

Earnings from your cash account can also be used to pay the premium. The downsides to this type plan is that it does take a little more attention to monitor since the growth of your cash is tied to the current interest rate, and the fees can add up and drain your account (https://www.retireguide.com). Here are three common types of Universal Life Policies:

Indexed Universal - Your cash value growth is tied to the stock market index. Fees add up for this plan and there is a cap to how much you can earn.
Variable Universal - Your cash value can be invested in sub accounts such as stocks, bonds and mutual funds. There are 2 death benefit payout options. A level death benefit pays a set amount with the remainder going back to the insurance company. A variable death benefit pays the face amount and the cash value, but at the cost of a higher premium. This policy has the highest fees.
Guaranteed Universal - This plan offers a fixed death benefit and fixed premiums. The premiums are generally lower since these plans have little to no cash value.

Burial Insurance/Final Expense Insurance

This plan is purchased through an insurance company. This is a small policy specifically designed for funeral expenses, usually in amounts from $5000 to $25,000. The application process is easy and in some cases non existent. Unfortunately, because of that, these plans usually only pay out a prorated amount to beneficiaries based on how much you have paid in already.

This policy is a good choice for you if you cannot qualify for a whole or term policy. It is expensive, but in some cases, it is better than nothing. *You can learn more about Burial Insurance with our in depth article.

Pre-need Insurance

This plan is similar to burial insurance, in that it is usually for an amount large enough to cover funeral expenses. What is different is the fact that these policies are bought through a funeral home usually. This means the insurance will only cover services provided at that one funeral home, meaning any other services may not be covered. The details on this type of policy can vary by location (https://www.lhlic.com).

Insurances That Don’t Cover Funerals

It's worth it to look into the above mentioned types of life insurance policies. Insurances that we normally carry, like our health insurance and homeowners insurance do not cover the cost of funeral expenses.

Signing up for a Life Insurance Policy

There are many ways to go about finding a life insurance policy. Some employers will offer an option for their employees, or you can purchase a policy as an individual. The first thing you have to do is decide what kind of policy you want, term, whole, universal, etc. The next thing is to decide how long you need coverage and how much coverage you need. Once you have found a plan that suits your need, you will, in most cases, need to fill out an application, take a medical exam, and wait to see if you are approved (https://www.policygenius.com)

Working With Your Insurance Company to Receive Benefits

To receive payout from a life insurance policy, the beneficiary must send a claim to the insurance company that carries the policy. They will need to submit an official death certificate as well as provide basic information about the deceased and cause of death. Most companies will have a claim form available to fill out.

After the company receives the claim, it usually can take anywhere from a few days to a few weeks to process. Once it is processed, the death benefit can be paid out in two ways: Lump sum or multiple payments. Often, there will be an option to put the amount in an interest accruing account as well (https://www.experian.com)

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