Is Funeral Insurance the Same as a Prepaid Funeral?
When someone is thinking ahead to their own funeral, perhaps the biggest question mark is about how to pay for it. There are numerous funeral planning solutions available that can help a consumer make these financial arrangements, but they don't all necessarily have the same outcome. Prepaid funerals and funeral insurance are terms that are often used interchangeably, but there are key differences.
A General Approach
Funeral insurance is much like any form of insurance. You pay your monthly premiums, and when the time comes, your next of kin (or nominated person) can claim the insured amount to cover the expenses of your funeral. Interestingly, the payout is simply a payout, with no restrictions on what the funds are actually used for. The nominated person is entitled to the provided amount, but there's no legal obligation to use these funds for their intended purpose.
A funeral insurance policy also comes with some drawbacks. Your monthly premiums may increase with age, and the premiums you pay can well exceed the policy value—as in, the payout may be far less than the overall value of the monthly premiums that have been paid. Funeral insurance policies can be useful, but it's possible to achieve the same outcome by paying funds into a specific bank account that's payable upon death to a nominated beneficiary.
Prepaying a Funeral
Prepaid funeral plans are different from insurance. The plan is either with a general provider or a specific funeral home. You can theoretically pay for the plan in a lump sum, although paying it off in monthly instalments is usually more manageable. This protects you from inevitable price increases in the future, allowing you to lock in the costs of the relevant products and services at today's prices, meaning your prepaid plan's cumulative price is unchanged. For example, if the value of your plan is $5000, the eventual spending power of this amount won't be reduced via inflation, and it will still be worth $5000 when the plan is executed, which could be many years in the future. Your funds are also protected because the provider or funeral home must hold your money in a registered funeral plan, regulated by your state or territory government.
Funeral insurance has its uses, but since these funds are intended for a specific purpose, you might be better off choosing a payment plan specially formulated to cover the costs of your funeral, rather than a general financial product such as insurance. For more funeral planning solutions, contact a funeral home near you.