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Burial insurance is only for a small subset of people. Small interest rates, high fees, and insurance company delays might motivate people to find better options for their estate plan. Burial insurance isn’t a good fit for most people. A Payable on Death account, Transfer on Death account, Roth IRA and/or prepaying funeral expenses can provide more flexibility, higher returns and quicker support at a lower cost, depending on your situation. What is Burial insurance? Burial insurance is designed to cover funeral and other end of life expenses. You pay monthly or annual premiums. Once you die, the insurance company will send your beneficiaries a check for those expenses. It’s also known as funeral insurance or final expense insurance. Burial insurance is commonly either a small whole life insurance policy or sometimes a small term life insurance policy. A whole life insurance policy lasts throughout your whole life, as long as you keep paying the premiums. What’s different is that it has a death benefit and it sets aside your monthly premiums in a separate account that accumulates some interest. The average whole life insurance interest rate is 1.5%. A burial term life insurance policy works similar to a normal term life insurance policy. You sign up for a period of time of coverage such as 20 years and your premium is set during that. Term insurance is drastically cheaper than whole life but only provides the death benefit payout, not the guaranteed interest. A term life insurance policy can often cost 1/10th of whole life insurance for the same amount of coverage. The monthly premiums can cost anywhere from $20 - $250 depending on age, gender, health, and coverage amount. Burial insurance often isn’t needed if you already own life insurance. Because the payout for life insurance is larger, it does much more than just cover funeral expenses. It can replace a breadwinner’s missing income, or pay off a house or other debts, or gift tax-free money to your beneficiaries. A life insurance payout can take anywhere from 2 weeks to 2 months. Burial Insurance Advantages: Provides flexible, tax-free funds to your beneficiaries Skips probate for a simple inheritance Doesn’t fluctuate due to stock market Burial Insurance Disadvantages: Could possibly cost more the policy than the policy is worth Much lower return than other options Moderate to high fees Payable on Death / Transfer on Death Account A Payable on Death/Transfer on Death account is designed for easy transfer to a beneficiary while skipping probate. Only the account owner, not the beneficiaries, can access the money while the owner is alive. A POD or TOD account can be transferred to beneficiaries sometimes quicker than a life insurance payout. It only requires proof of death such as a death certificate which can be acquired within 1 to 4 weeks or sooner. This can provide quick and reliable funds for your loved ones. If there’s a discrepancy between the will and a POD/TOD account, the beneficiary listed on the account takes higher priority than the will. Payable on Death accounts are normal bank accounts with a beneficiary attached. Some states allow unequal allocation of funds to beneficiaries. The highest savings accounts provide around 3% annual return. Transfer on Death accounts work the same way but with ordinary investment accounts. You contribute money to the account and you invest in stocks and bonds. Investments like that can provide average 4-8% annual returns but some years investments go down in value. While investments can provide higher growth than a savings account, this creates the risk of your beneficiaries inheriting stocks in a down market. Please educate yourself or consult a fee-only financial advisor before you invest significantly in the stock market. You can list multiple beneficiaries and distribute the assets in whatever percentages you wish. An IRA or 401k cannot be a transfer on death account because those accounts have their own inheritance rules. Payable on Death/Transfer on Death Advantages: Free or low cost Avoids probate Higher in priority than a will Investment account assets will have favorable tax treatment for beneficiaries Compound growth (unlike an insurance policy) Payable on Death/Transfer on Death Disadvantages: 1 - 4 weeks till money can be accessed Creditors still have claim to TOD assets All bank account assets are passed to beneficiary in a taxable lump sum, possibly raising their tax bracket. Investment account fluctuates with stock market No guaranteed death benefit like insurance. What the account is worth is what they get. Roth IRA Roth IRA accounts are retirement investment accounts that allow your money to compound for years and withdraw it tax-free. The tax-free withdrawals can happen after age 59 ½ or under special circumstances. While a Roth IRA has different benefits than the Traditional IRA, the inheritance rules are much more straightforward and easier for the beneficiaries. The beneficiary wouldn’t have to pay income taxes on the money in the account, unlike inheriting a Traditional IRA. This can make the inheritance process much easier for those grieving. If your future beneficiaries are in a higher or equal tax bracket than you, it's probably better to bequeath a Roth account to them rather than a Traditional IRA. If they’re in a much lower tax bracket than you, it’s probably better to contribute to a Traditional IRA to leave them The main benefit of leaving behind a Roth IRA, as opposed to using burial insurance, is the massive compound growth it provides. Investments in a Roth (such as ETFs, stocks and bonds) can average 4-8% annual returns. Roth IRA Advantages: Simpler, tax-free inheritance (like burial insurance) Higher returns; average 4-8% Free to open an account Withdrawals are tax-free (After age 59 ½ or special circumstances) Beneficiaries don’t have to take it out all at once Roth IRA Disadvantages: Annual contribution limits to the account: $6,000 - $7,000 Withdrawal restrictions depending on age or circumstances (like whole life insurance) No guaranteed death benefit Death during a down market could heavily reduce funds available for funeral expenses Should I prepay funeral expenses instead of buying burial insurance? Prepaying funeral expenses can make the financial process simpler for your grieving family. But there can be high fees and risks through the funeral home. This route can be a decent option for those who are certain they’ll stay in that city and are certain they want a specific funeral home. Funeral homes and prepaid funeral plans are not well-regulated. It’s possible you can sign up for a policy that ends up costing you and your descendants more than the price of the funeral. If you do prepay, look into getting a guaranteed plan as opposed to an unguaranteed plan. This will lock in the price you paid for the casket and service. You can pay in either lump sum or installments. There’s a chance of your funeral home closing down before you pass. 89% of funeral homes are privately owned by families. So there isn’t much, if any, transferability between two funeral homes if you already paid a large sum to a closed funeral home. There are a couple situations where prepaying might make sense, if you know for certain that you’re not going to move cities before you die and/or if you really want your service to be done at a specific funeral home. While they do provide the emotional benefit of possibly making the arrangements easier for your family, the rigidness and lack of return make this a poor option for most folks. Prepaying Funeral Expenses Advantages: Can reduce your beneficiaries workload Ensures your service is how you want it Might save money Doesn’t fluctuate due to stock market Prepaying Funeral Expenses Disadvantages: Risk of funeral home closing Money doesn’t grow Could have additional fees Depends on you not moving for several years Conclusion Burial insurance can be a great choice for some. But if you’re concerned about quickly getting funds to your family, then a TOD or POD account might be a great addition to your estate plan. If you’re concerned about the small growth of whole life insurance, then funding a Roth account, TOD or other investment account could be right for you. If you’re certain about where you want your funeral to be and you want a simple process for your loved ones, then look into prepaying funeral expenses. If you have children or debt to pay off, then you probably need more coverage than what burial insurance provides. Look into several options for your estate plan. If still concerned, consult with a fee-only financial advisor who specializes in estate planning.

Want to Become a Financial Advisor? You're in the right place.

Break Into the Financial Advisor Field!
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Want to Become a Financial Advisor? You're in the right place.

Break Into the Financial Advisor Field! Improve How You Serve Others!

Recent Posts

Break Into the Financial Advisor Field!
Improve How You Serve Others!