Death is one of the few certainties, but how you pay for your funeral isn't. To address this afterlife financial issue, the insurance industry offers what it euphemistically calls "final expense plans." The public may know this type of coverage as burial policy or burial insurance. Consumer groups see them as a bad investment.
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Whatever their name and reputation, these policies are a type of whole life insurance that are intended to pay for certain expenses related to death, including a funeral, cremation and burial.
No Medical Exam
Burial policies are not the same thing as prepaid funeral policies, which are a method for paying a funeral director in advance for your final arrangements, says Joe Skarda, director of education and training for Sapient Financial Group.
Usually completed with simplified underwriting, burial policy applicants will have to answer a few basic questions about their health but will not be subject to a medical exam, Skarda says.
Waiving the medical exam means almost anyone can qualify and therefore drives up the cost of burial insurance as much as 20 times more than a fully underwritten term life policy, says Byron Udell, CEO and founder of AccuQuote.com.
Burial policies "tend to attract the unhealthy people, so they tend to be expensive," Udell says. "Healthy people can get the better deal (through) fully underwritten products."
For example, a 50-year-old might pay $3 for each $1,000 worth of coverage for a 20-year term life policy or $150 a year for $50,000 worth of coverage, Udell says.
The same 50-year-old could pay $20 or $30 per $1,000 for a burial policy or $100 to $150 a year for $5,000 in coverage, Udell says.
"If you think you're going to be dead in six years, it might work out. Otherwise you might be better off putting it under the mattress," Udell says. "Typically, we sell burial insurance as a last resort. People can't qualify for term life and want to buy something. Or we'll sell them an accidental death policy and some final expense."
At the same time, simplified underwriting doesn't mean a burial policy is a sure thing.
Applicants can be rejected if they disclose they already have cancer, use drugs or have been hospitalized for more than 20 days in the past year, Udell says.
Better Options Available
Once they're approved, policyholders usually are subject to two-year contestability and suicide clauses during which time the insurer may fight a claim, says Skarda.
"If a person is aware of something that's wrong with them, buys a policy and six months later passes away, the insurance company will investigate the claim during the period," Skarda says.
Although burial policies may appeal to people of limited means without other insurance options, they don't seem like a good value to Bob Hunter, director of insurance for the Consumer Federation of America.
"I think it's a predatory type of insurance," Hunter says. "The people who buy it tend to be less educated and low-income and tend to be minority."
Instead of buying burial insurance, Hunter recommends trying to purchase an underwritten term life policy. He recently worked with a woman, who, for the same premium as a $5,000 burial policy, was able to acquire a 20-year term life policy with $75,000 in coverage.
Saving the money yourself also may yield a better return on your investment.
"If you're thinking about a burial policy, you should consider putting money aside and having a savings account," Hunter says. "It's a better use of your money."