Pre-Need Insurance Plans: Pros and Cons
Posted May 6th, 2019 by Jason Metz
Pre-need plans are a way to make sure your funeral is paid for. Some are insurance policies and some are contracts with funeral homes that use a trust for funds. Pre-need plans outline the specific funeral arrangements of your choice, such as the casket, flowers and funeral services. It’s good for people who want to ensure that their funerals are exactly the way they prefer, with a way to pay for it.
You’ll generally work directly with a funeral home and lock in prices at the time you buy a pre-need plan. If the plan is through an insurance policy, it’s generally sold by a funeral director who is also a licensed insurance agent.
A pre-need plan payout goes directly to the funeral home, not your family.
When you buy a pre-need plan, you’ll typically pick out options such as:
- Burial or cremation.
- Casket or urn.
- Cemetery plot.
- Types of service, such as viewing or visitation.
- Cost for digging and filling a grave.
The national median cost of a funeral with a burial and viewing was $7,360, and the cost for cremation with a viewing was $6,260, in 2017, according to the National Funeral Directors Association. These costs do not include common expenses such as flowers, markers, monuments or obituaries.
Paying for a pre-need insurance policy
Pre-need insurance policies are a form of whole life insurance. Payment choices often include one lump-sum payment or three-pay, five-pay, seven-pay or 10-pay plans.
Pre-need policies may have a “cash surrender” value, so if you decide to end the insurance policy during your lifetime, you may receive some money.
Are there age limits for buying pre-need insurance?
Pre-need insurance policies generally define “issue ages” for buying. They may require a minimum age of 36 or 40, and have a maximum issue age of 80 or 90.
Do I need a pre-need plan or insurance?
If you want to provide funds for your funeral, there are several options for final expense insurance. Pre-need insurance has pros and cons worth considering. Here are some of the most common.
You make the decisions. By selecting your own funeral arrangements, your family will not have to choose quickly or negotiate cost later, and the pre-need insurance payout will go directly to the funeral home. This can help alleviate stress and guesswork among your family
Prices are usually guaranteed. If your chosen arrangements have increased in price, your family will not have to make up the difference. Alternately, if prices have gone down, you’re locked in at the original price.
Some items can be replaced. If an item of your choosing, such as a casket, is no longer available at the time of need, your policy might replace that item with one of similar style, quality and value.
Your state may allow for a “free look” period. Many states allow buyers to cancel pre-need insurance (and other types of life insurance) and receive a full refund within a certain timeframe. This timeframe can vary by state. For example, Florida allows 14 days while California only allows 10 days.
Some pre-need contracts are Medicaid-exempt. If the pre-need plan puts your money into a Medicaid-exempt trust, that money does not count toward your assets for Medicaid eligibility. But not all pre-need plans are Medicaid-exempt.
There’s not a lot of flexibility with pre-need plans. Your needs may change over time and being locked into a contract can make it difficult to change plans. And since the pre-need insurance payout goes directly to the funeral home, your family won’t have the flexibility of using the money for other bills.
Not all pre-need plans can move with you. If you move to another state or choose another funeral home, your policy may not move with you.
Your health could affect what plan you qualify for. Health conditions can affect what type of pre-need plan you qualify for, and the cost.
Your policy may have graded death benefits. If you die within the first several years of the policy, your beneficiaries may not receive the full death benefit.
A pre-need policy may be non-transferable and non-refundable. Your policy may not allow you to transfer arrangements to a new funeral home, or to another person, and you may not get a refund if you cancel it after your state’s free-look period.
Not everything is guaranteed. If a pre-need policy isn’t paid in full by the time of death, depending on your state and insurance company, the death benefit may not be guaranteed.
Changes to the arrangements could nullify a pre-need insurance policy. If your survivor makes any changes, such as different services or merchandise, your policy could be null and void, and your family may have to pay current prices for funeral arrangements.
Families need to know about a pre-need plan. If you buy a pre-need plan, it’s critical to let your family know what funeral home has the plan and what the details are. Otherwise your family could end up paying for a funeral somewhere else, without knowing you already had arrangements.
Know what happens if the funeral home goes out of business. Many things could happen between the time you buy a pre-need plan and the time it’s used. Read the contract to know what happens if the funeral home of your choice goes out of business.
Tips for buying pre-need funeral plans
- Get a price list from the funeral home director. Under the Federal Trade Commission’s funeral rule, funeral directors must give you price information. Here’s a funeral cost and pricing checklist from the FTC.
- Compare costs at a few different funeral homes. Prices for similar services can vary significantly, according to a 2017 investigation by NPR.
- Research funeral homes. How long has the funeral home been in business? Do they have a good reputation? It’s a good idea to check with the Better Business Bureau.
- Get an itemized statement of arrangements and keep a copy of the pre-need policy or contract. It’s a good idea to let your beneficiary know where they can find it.
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