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Pre-need life insurance

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Funerals can be unpleasant to think about, but they are an unfortunate necessity. Adding to the emotional burden of a family death is an often-hefty financial load. Funeral expenses, overall, can climb into the $10,000-$20,000 range in the United States. According to the National Funeral Directors Association, the average cost of funerals that included viewing and burial in the U.S. for 2019 was $7,640.  

With costs that steep, it’s not surprising that people often try to find life insurance strategies for dealing with these fees well ahead of time. Pre-need insurance is one of the many tools you can use to keep costs from weighing on your loved ones if you pass. But what is a pre-need insurance policy, and how does it work? The answers will be explored in this article.

What is pre-need life insurance?

Pre-need life insurance is a service contract that individuals can take out with a funeral home. Essentially funeral homes serve as pre-need life insurance companies, selling burial services well in advance of when they are needed. That’s one of the significant differences between pre-need and final expense insurance. With final expense, you would take out an insurance policy from an insurance company. But with pre-need insurance, you purchase the contract directly from the funeral home of your choice.

When you purchase a pre-need plan, you select the services that you want for your funeral. The costs are reflective of the funeral home you choose; each funeral home prices its services differently. Within these contracts, there are guaranteed services and non-guaranteed services. With guaranteed services, prices are fixed, while non-guaranteed services may fluctuate in cost as they would for the funeral home, based on inflation or a change in market prices for those services.

Who needs pre-need life insurance?

Pre-need insurance tends to be less flexible and more costly than some of the alternatives. That said, there are people who can benefit from pre-need. While term life insurance is more flexible and can be cheaper (once the payout is calculated), it often has qualification requirements that may be difficult to meet. For anyone whose health prevents them from obtaining a term life insurance policy, pre-need life insurance might be a good fit.

Pre-need insurance generally does not have qualifications and requirements beyond the payments for the contract. This accessibility is because you aren’t purchasing a traditional life insurance policy with a payout. Instead, you are simply paying for the services of a business before they are needed. As a result, funeral home pre-need prices may vary more between businesses than between purchasers.

How to get pre-need life insurance

Getting pre-need life insurance is a little different from applying for other insurance policies. These contracts are purchased directly from a funeral home and not from an insurance company. Despite this difference, much of the process is similar.

  • Contact multiple funeral homes for quotes
    • Much like hunting for the best traditional insurance plan, you’ll want to shop around for the right pre-need plan. Since each funeral home determines its pricing, it’s best to get quotes from several different funeral homes.
  • Compare costs between funeral homes
    • Once you’ve received a few quotes, compare the costs of different services. This part can be a little tricky and a bit daunting. You only want to compare the prices of the services you want, so you’ll need to have a good idea what your funeral preferences are.
  • Select your funeral home
    • Once you’ve estimated how much your funeral would cost from different funeral homes, select the one that’s a good financial fit. Personal wishes around location and community can factor in significantly here. Beyond that, it can be smart to choose the business that offers the most reasonable prices for the services you want.
  • Negotiate the contract with your chosen funeral home
    • Contact your chosen funeral home and inform them that you’d like to purchase a pre-need life insurance plan. You’ll receive the necessary paperwork and be walked through the process. During this time, you can select which of the services you wish to have within your plan.
  • Sign off and make payments
    • After you and the funeral home have finalized your plan, all that’s left is to set up and initiate the payments. These plans can generally be paid for through installments or in one lump sum.

Why get pre-need life insurance?

The main reason to purchase a pre-need life insurance plan is to make sure that your funeral costs are covered. But beyond this basic motivator, other reasons to have pre-need insurance are more nuanced. For example, those who want the most say in how their funeral goes can accomplish their wishes with a pre-need plan. The insured makes all the service choices when the contract is created. Otherwise, these plans can be useful for those who might have trouble qualifying for a traditional term life insurance policy. Below, we have summarized the advantages and drawbacks of pre-need insurance policies. 

ProsCons
You make all the service choices when you sign the contract.Limited flexibility after the contract has been signed.
Guaranteed pricing can save you money if services become more expensive over time.Guaranteed pricing can lose you money if services become less expensive over time.
Many funeral homes to choose from, each with its own pricing plan.Pre-need plans are often locked to the funeral home that sold them.

Pre-need vs final expense insurance

While both types of plan have similar goals, significant differences exist between them. Both are intended to ensure that your funeral costs are covered, but acquiring and managing the policies differ from that point.

Pre-need is purchased from a funeral home while final expense is bought from an insurance company. Pre-need is only for funeral costs and is paid in advance. Final expense has a death benefit, or payout, with little to no restriction about how that payout is spent. Pre-need is funeral-home specific, whereas final expense is specific only to the insured individual and does not have ties to a particular funeral home.

In many ways, the difference between these two approaches boils down to flexibility. If you know where you want your funeral to be held and how you want it to look, then a pre-need plan can make sense. If you’re unsure about the where and how, then a final expense plan can keep your options open while still providing finances for funeral costs.

The takeaway

  • Pre-need life insurance is purchased from a funeral home to cover the costs of their services.
  • Pre-need life insurance is one alternative to final expense life insurance.
  • When the covered individual passes away, the funeral home that issued the pre-need plan will perform the funeral services as specified within the contract.
  • Pre-need plans are generally tied to the funeral home that issued them.

Pre-need funeral insurance is one of several ways to make sure that your funeral costs don’t become a financial burden to your loved ones. These plans are purchased from a funeral home and detail the services that will be provided. While term life insurance or final expense insurance may be better for many, pre-need plans can be a good fit for those who want complete control of how their funeral is arranged.

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