Pre-Paid vs Life Insurance is a question I get often. In this article, I will explain to you the difference so that you can make an educated decision. To be able to make that decision you need to understand how each of them works.
Pre-Paid Funeral Plan
Prepaying for your funeral is one way to ease the burden on your family following your death and make sure your wishes are carried out.
To help relieve your family of some of this expense and effort, you can pay for your funeral in advance with a pre-paid funeral plan purchased directly from a funeral home. In addition to making things easier for your family during a difficult time, pre-paid funeral plans can also be a good way to spend down money in order to qualify for Medicaid.
A Pre-paid funeral plan is an arrangement between you and a funeral home where you make an upfront payment to that funeral home today based on an agreement that the funeral home administers funeral services in the future and cover all said funeral costs.
What is usually covered in a funeral plan? It depends on which plan you buy from a funeral plan provider. Many providers will let you choose between a cremation and burial funeral plan. The initial costs are similar, but watch out for additional costs that won’t be covered. You have to always check exactly what is and isn’t included in the plan before you buy, as every plan has its differences
- What’s usually included? Transport of the body to the funeral director’s location; Care of the body, Visiting the body in a chapel of rest, a coffin, hearse, and funeral director personnel.
- What’s sometimes included? It is depending on the plan: Minister’s or celebrant’s fees, Limousines for mourners, fees for the crematorium.
- What’s generally NOT included? Funeral notices, Embalming, Buying a burial plot, Flowers, catering, head stone or memorial.
The parts which are generally NOT included can cost a lot of money. A burial plot or headstone can & will cost thousands, for example, so even if you choose to take this route make sure you plan for what’s not included.
Pre-paid funeral plans come with many risks, so you need to exercise care when purchasing a plan. Consumers lose money every year when funeral homes go out of business before the need for the funeral arises. If the funeral home mismanages your funds, there may be no way to recover them. In addition, customers are not always entitled to refunds if they change their minds, and some funeral homes sell policies that require additional payments or that can’t be transferred if the customer moves. If you decide to go ahead with a pre-paid funeral plan, the following are things to consider:
- Shop around. Prices vary greatly, so it is a good idea to check with a few different ones before settling on the one you want. The Federal Trade Commission’s Funeral Rule requires all funeral homes to supply customers with a price list that details prices for all possible goods or services. The rule also stipulates what kinds of misrepresentations are prohibited and explains what items consumers cannot be required to purchase.
- Reputable Funeral Home. There have been cases of unscrupulous funeral providers taking advantage of customers, so make sure you choose a funeral home with a solid reputation.
- Read The Contract. Before signing, it is important to know what you are agreeing to. Can you cancel the plan and get a refund? Is the plan transferable if you move to another area? Are you paying just for merchandise or for funeral services as well? If prices for funeral merchandise and services rise, will your estate be responsible for paying additional costs?
- Where is the Money? The pre-paid plan should provide information on what the funeral home will do with the money you pay them. Some states have protections in place to make sure the money is safeguarded, but other states offer no protections. Is the money put into a trust account? What happens to the interest income? Is there a plan if the funeral home goes out of business? What happens to any money left over?
- Medicaid. If you are buying the policy as part of Medicaid planning, you must purchase an irrevocable plan, which means you can’t cancel or change it once it is bought.
If you purchase a plan, be sure to tell your family about it and let them know where the documents are. If your family isn’t aware of it, then that plan is useless and you just given a funeral home free money.
Most Final Expense plans do NOT require any kind of Medical exam. All you have to do is answer medical questions on a short application regarding your medical history. The insurance companies will also verify your prescription drug history because prescription drugs are the best way to tell what someone has or had.
- Level – A level plan covers you from day one after you approved. If you can answer “No” to all or most of the questions on the application you will get the best price and immediate coverage.
- Graded – With a Graded plan you will get prorated coverage because you answers that you have some bigger health issues going on. With these plans, for example, you get 30% coverage in the first year and 70% coverage the second year and then 100% thereafter.
- Guaranteed Issue – If you have major health issues going on you can buy a Guaranteed Issue plan which does not ask any medical questions. You see these plans most of the time on TV. Colonial Life, AARP and Global Life are well known for selling these plans. The reason they can offer a plan that does not ask any health question is that in the first 2 years of the plan you don’t have any coverage. A lot of people buy these plans not knowing that they don’t have any coverage in the first 2 years.
Once you are approved for one of the plans, all you need to do is make your payment as scheduled, that’s it.
- Guaranteed Rate – Once approved and as long as you make your payment the amount you pay will stay the same forever.
- Guaranteed Coverage – Once approved you can not be canceled down the road if your health changes.
- Cash Value – Your policy will build Cash Value, which means after some time you will have access to a credit line in your policy that you can use if you need it.
- No Termination Date – As long as you make your payment, your family will get a check when you die. There is no date in the plan at which point it will cancel like it does when you buy a Term insurance policy.
- Tax-Free – When your beneficiary gets the check from the Insurance company, they will not have to pay any taxes on that amount. So if you leave them $10,000 that’s what they get to use.
Final Thoughts on Pre-Paid vs Life Insurance
From experience I can tell you that most people use Pre-Paid plans from funeral homes in two instances; 1. You are spending down your assets to be able to qualify for Medicaid or 2. You are settled in your area and you already have family members at a certain cemetery and you know you want to be buried specifically there.
For any other instance, you should always just use a Final Expense Plan. The reason for that is that life changes over the years and so do our wishes. You don’t want to be stuck in a contract where you can’t change anything. With a Final Expense Plan, your family will get a check to do with as they need to.
If you live in Pasco, Hernando, Pinellas, Hillsborough, Citrus, Polk, Hardee or Sumter counties in the Tampa Bay area, you can click on the next banner and book an appointment directly with. I will answer any questions you might have and we will find a plan that fits with what you need and your budget.