Funeral Insurance: Do You Need It?

Photo: Sheila Sund, Flickr

Let's face it: It's not a trifling financial matter to be laid to rest. According to data from the National Funeral Directors Association, the median cost of a funeral, not including a vault, was about $7,000 in 2012. A vault, often required by cemeteries, can add more than a thousand dollars to that. Thus, many people opt for funeral insurance. You may not need funeral insurance, though, and you should learn more about it before buying it.

For starters, let's define terms. "Funeral insurance" refers to a policy designed to cover death-related costs for someone. Thus, while a life insurance policy might be for several hundred thousand dollars, or several million, a funeral insurance policy might be for just $10,000 or $20,000 or more. (The proceeds might cover not only a funeral, but perhaps also a fancy and expensive casket and some medical bills, as well.)

There are several different kinds of this insurance, as well as some other options that can serve the same purpose. Here are the kinds of names for this coverage that you'll likely run across: pre-need funeral insurance, burial insurance, and final expense insurance.

Photo: Steve Snodgrass, Flickr

Pre-need funeral insurancePre-need funeral insurance is usually offered by a funeral home or a funeral service provider. It's often a whole-life policy connected to an underlying insurance company. A key trait of these policies is that they sometimes have the funeral service provider as the beneficiary. You pay your premiums, and then whenever you die, the provider takes care of the funeral. That can sound fine, but it can be problematic if you move away and die elsewhere and can't use the benefit at another funeral home. One possible benefit of these policies is that they will generally pay out very soon after death, whereas regular life insurance policies sometimes take weeks. These policies also often cost more than alternatives.

Final expense and burial insuranceThese kinds of policies can be term life policies or whole life policies. They will generally cost less than pre-need insurance and will feature a beneficiary you name and not a funeral service provider. Your aim is for the beneficiary to spend the money on your funeral and death care, but he or she is able to spend the money in any way. Some of these policies can get a bit fancy, including cash-value accumulation features, as some whole life insurance policies do.

Pre-payingYou may also be encouraged to pre-pay for funeral arrangements. This, like a pre-need insurance policy, can be tricky, when it's tied to a particular funeral service provider. If you move, for example, it might not be transferable. Still, if you do opt to prepay, be sure you know exactly what you're getting -- certain specified services, or a certain total dollar amount of services. Find out whether you're locking in current rates or if someone will be charged more as prices rise. Be sure to alert your loved ones that you prepaid your own arrangements, too, and let them know where the paperwork is, too, lest they end up paying again.

Photo: Stephan Ridgway, Flickr

Pre-planningIf you opt to forego any funeral-related insurance, that can be a perfectly sensible decision. Don't forego pre-planning, though. Lest you leave your loved ones with not only sorrow but also uncertainty, it's a smart idea to jot down your preferences and wishes related to your death. You'll want, of course, to take care of yourself legally and financially, with powers of attorney designated, an estate plan, a will, an advanced directive, and/or a living will. But go a few steps further and let your loved ones know whether you'd rather be cremated or buried, and whether you'd like an inexpensive, average, or fancy casket. If you don't tell them, they will have to guess, and they may spend more than you would have wanted.

The big pictureAs you consider any of these products, remember that your primary aim is to make some arrangements in advance to cover some end-of-life costs. This problem can be tackled with some of the options above, but also in other ways. You might simply plan to have a portion of your regular life insurance policy cover these costs instead of buying separate funeral insurance. You might set aside some savings on your own for this purpose, with your spouse or children able to access the money.

It's smart to think about it all now, though, ideally discussing your preferences and any decisions with your loved ones.

The article Funeral Insurance: Do You Need It? originally appeared on Fool.com.

Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter,has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.