Funeral Insurance: Do You Need It, or Is It a Ripoff?
Make sure you’re not sending your money to the great beyond
In 2012, the median price of a funeral was $7,045, according to the National Funeral Directors Association, and those prices are only going up. So it may be tempting to buy a specialty life insurance policy to help consign your remains to the great beyond and not burden your loved ones with the expense. But is funeral insurance really worth it?
On the one hand, such a policy can provide a hedge against inflation. Funeral costs are increasing by 3 to 4 percent per year, according to National Funeral Directors Association president-elect Bob Arrington. “If you purchase it through a funeral home, the funeral home guarantees that the agreed-upon price of your funeral will never increase,” he says. The money can be used only for your funeral expenses. “The money can't be removed by the funeral home or the children or anybody without a death certificate," he says.
But some consumer groups caution against buying funeral insurance. The premiums will probably end up costing “as much or more” than your survivors will receive in a payout, according to the Funeral Consumers Alliance, a nonprofit organization "dedicated to protecting a consumer's right to choose a meaningful, dignified, affordable funeral." J. Robert Hunter, director of insurance at the Consumer Federation of America, says “It is always the wrong way to buy life insurance," and calls funeral insurance “very expensive for the benefit provided.” That group is an association of nonprofit consumer organizations "established in 1968 to advance the consumer interest through research, advocacy, and education."
Where your money goes
Hunter advises caution when doing business with funeral homes because he says they benefit financially when you buy a policy from an insurance company they recommend. “They get kickbacks — commissions usually,” he says.
Even the New York State Funeral Directors Association opposes funeral insurance because it creates a conflict of interest within their industry. “For example, one of the largest pre-need insurers had been an arm of a large casket company, and their insurance vehicle ties consumers to their products through types of discounting,” the association said in a public statement.
National Funeral Directors Association's Arrington defends commissions, saying they help cover the expense of paperwork, marketing, legal costs and inflation. He recommends buying a policy through a reputable funeral home, not from companies that advertise on TV. Such operations usually don't guarantee a payout for the rest of your life, only for the life of the policy. “You can pay $2 per week for 10 years, but if you're still alive at the end of the 10 years, you don't get any benefits,” he says.
Other ways to finance your funeral
Instead of a funeral-only insurance policy, Hunter suggests instead looking into regular, low-cost term life insurance. “If you need life insurance for a dependent, you need to get enough to cover all future costs, of which funeral expense is a small fraction,” he says. “Food, housing, clothing, transportation, education and so on are much more important to cover.”
If you want to avoid insurance altogether, consider opening a “pay on death” bank account, then adding money to it a little at a time until estimated funeral costs are covered. After you die, the bank will release the funds to whomever you have designated, such as a friend or family member, according to the Funeral Consumers Alliance.
No matter how you chose to finance it, you have the legal right to purchase only the funeral services you truly want, according to the Federal Trade Commission. Nobody can force an expensive “package deal” on you. You also have the right to see, in writing, a price list for everything you're purchasing, before you pay.