Funeral Insurance - Is It Worth It?
There seems to be a lot of advertising lately for funeral insurance, but is it really worth it? Will you really be doing the best thing for your family by insuring them against your funeral costs?
Here I will have a look in depth at the real cost and benefits of funeral insurance, to help you make an informed decision.
What Is Funeral Insurance?
The cost of a funeral is more expensive than most people expect. Even a simple funeral can cost several thousands of dollars.
Funeral insurance allows you to pay a regular premium of a small amount. In return, if you die while you are regularly paying for the policy, your heirs will receive an agreed lump sum. This will be paid almost immediately upon your death so it can be used for funeral and other expenses.
Funeral Insurance Advertising
Advertising for this kind of insurance usually aims to make potential clients feel concerned about leaving their loved ones with the burden of funeral expenses.
Ads point out that the costs will be large and immediate, at a time when families are already emotionally drained.
They list the costs to include not only the funeral, but the cost of a wake and even accommodation for mourning relatives.
The impression they leave is that to do the right thing by those they love, and for peace of mind, everyone should be covered with funeral insurance.
At A Glance
After 14 years, at the most, funeral insurance will cost you more than if you just saved the money.
The Real Cost of Insurance
Insurance costs are different depending on the company and on where you are located.
For this exercise, I will take a recent example I have seen of insurance which offered $5,000 cover for $7 per week. In other words, you would pay $7 per week and your heirs would be guaranteed to receive $5,000 upon your death.
If you were to take up this policy, you would pay, let's say a round $30 per month for as long as you wish to be covered.
So let's look at some possible scenarios .
Imagine that, instead of paying premiums, you were to simply save this money at home.
It would take you just under 14 years to save $5,000.
Over this time, premiums for your insurance would be sure to increase, so you can pretty much guarantee that you would save the $5,000 faster as the amount per month increased.
After this time, you would not need to pay any further amounts to have your $5,000 funeral costs.
Saving With Interest
If you decided to put the money into an interest bearing account, you would save more.
You would have to pay tax on the interest, so to be very conservative, let's look at an after tax interest rate of 2%.
It would take just over 12 years to save $5,000. Again, it would be faster as the amount of potential premiums increased.
After this time, you would not only not have to pay any further amounts to keep your $5,000, but you would be earning over $100 per year in interest.
Giving the Money to Your Heirs
If you gift the money to your heirs as regular payments (the same as the insurance premiums), and they use this to pay off part of a mortgage or loan, the value is increased even more than any kind of saving by you.
The advantage of this is that there is no tax involved in the savings, and the interest rate is higher, so affectively the value of the savings is greater.
The disadvantage is that the money will probably not be immediately available at the time of your funeral, so your heirs will need to have enough liquidity to cover costs then, even if you have already paid them to your heirs. There is also the risk, so to speak, that you might outlive your chosen heirs, and not inherit from them.
Buying Funeral Insurance
If you pay premiums as per above, after 14 years (or less with premium increases), you will have paid more than the money you would receive upon your death.
In order to keep that cover, you would need to continue paying the premiums until you die. Otherwise, all benefits will be lost.
Putting It All Together
Today, most people have access to some sort of credit card. If you are leaving any sort of inheritance, unless your estate is going to be caught up in some sort of dispute, the funds will be released to your heirs within a few months. It would therefore probably be most sensible for your heirs to pay for your funeral themselves when the need arises, and then claim back the costs from your estate.
If you have saved the money you would have paid in insurance premiums, that would certainly help!
On the other hand, if you know that you will not be leaving enough to cover your funeral costs, or that your heirs will be put into hardship by having to pay, then perhaps funeral insurance could be an option. In this case, I suggest getting advice on insurance from a trusted professional.
Just remember that when you buy a funeral insurance policy, in order not to lose it all, you are committing yourself for life.