In a sense, burial insurance doesn’t exist. Neither does funeral insurance or final expense insurance. Why do I say this? Because all these types of insurance would simply pay out when you die. So in reality, you’re just buying life insurance.
Burial insurance isn’t technically a scam. It works exactly as the contract you sign says it does. Unfortunately, people who end up buying this kind of policy are often wasting their money. Here’s why.
What Is Burial Insurance, Really?
Burial insurance is typically sold as a small whole life insurance policy. This is because whole life insurance will pay out no matter when you die, unlike term life insurance, which lasts for only a set term, such as 10 or 20 years. If you really need burial insurance, you definitely want it to pay upon death. Whole life insurance guarantees that, but it comes at a cost.
Whole Life Insurance Isn’t Worth the Expense
Personally, I hate whole life insurance. It’s an extremely expensive form of coverage that pays the seller massive commissions and provides you with money that in most cases you could have saved yourself.
Life insurance companies market whole life insurance based on fear and on really unique scenarios that don’t apply to the majority of customers. Whole life insurance ends up being a good deal only if you die early, which no one wants to do. Even then, a term life insurance policy would have paid out and cost much less than its whole life counterpart.
The other reason I don’t like whole life insurance policies is the effect that inflation can have on them.
Inflation also has an impact on term life policies, but because the insurance periods are shorter, the effect is not as significant.
Let’s say you take out a whole life insurance policy for $20,000 to cover your lavish funeral costs, but don’t die for 50 years. If inflation averages three percent per year, you’d actually need about $88,000 to pay for $20,000 in today’s costs. In effect, your life insurance payout would be less than a quarter of the size you intended it to be.
Of course, this wouldn’t be a problem if you take out a whole life insurance policy toward the end of your life. But be aware that if you do, your rates would be so high that you could probably just bank the amount of the premiums in a savings account and end up with more money if you live your full life expectancy.
Alternatives to Whole Life or Burial Insurance
Instead of a whole life or burial insurance policy, you can usually buy a term life insurance policy for 20 or 30 years and get a quote for a whole life insurance policy for the same amount. Then if you invest the difference in premiums each month, you may end up having more money than the whole life insurance policy could have paid out.
The Proceeds May Not Be Used as You Anticipated
Keep in mind that you have no control over what the beneficiaries of your insurance policy will do with the money paid out from it. They could use the money to pay for the lavish funeral you’ve always wanted, or they could use it to buy a Mercedes-Benz.
A Better Choice Than Burial Insurance
If you can afford burial insurance, you can afford to start saving for your funeral today. The average traditional funeral in North America will cost you from $7,000 to $10,000, according to the funeral home comparison site Parting.
Let’s say that you want a $10,000 funeral. Instead of paying whole life insurance premiums, simply save money each month and set it aside for your funeral. Here’s a chart showing how long it would take to save $10,000, based on different monthly contributions and not including the interest you could earn in a bank account or the returns you could receive on other investments:
|Savings per Month||Years Until $10,000 Goal|
While saving money for your funeral may seem morbid, chances are that it will end up being much cheaper for you than getting a whole life or burial insurance policy, especially if you’re young. And even if you’re older, chances are that the same will be true after factoring in the insane cost of buying whole life insurance late in life.
The main goal of insurance companies is to make money. They won’t sell a policy unless the numbers say that they’re on the winning side. Consider that carefully, and then decide what you want to do about burial insurance.