Does Pre-Need Funeral Insurance Make Sense?

Pre-Need or Prepaid Funeral Insurance is an insurance policy whose benefits cover the cost of the predetermined expenses of a funeral, cremation or burial. The expenses typically include standard funeral home services, funeral merchandise, church services and even burial services and merchandise. The purpose of Preneed Funeral Insurance is to set aside funds for your funeral, before the need arises, thereby protecting your loved ones and your financial assets.

Pre-need "arrangements," as they're sometimes called, are typically made with mortuaries, cemeteries, and/or insurance companies. The benefit of such plans is that, when you move on to the great beyond, your loved ones won't have many arrangements to make. They'll be able to focus mainly on mourning, because plots will have been chosen and paid for, along with the funeral and burial.

The downside of Pre-Need Funeral Insurance is that it tends to cost a lot of money. And that pile of money will be out of your hands and earning interest -- not for you, but for the people you paid.  Let's say you're aged 75 and you pay $5,000 for a cemetery plot and $10,000 for your casket and various services. That's well and good, but what if you're blessed and live another 20 years? You've lost the benefit of that $15,000 for a long time. If you had invested it and earned 10% per year on it, you'd have $101,000 to show for it!  Pre-need plans are often nonrefundable -- and often nontransferable, meaning you can't change your mind or switch mortuaries. They often have hidden fees, meaning your survivors could still wind up forking over plenty of money when you die. Plans can be mishandled, too.

Pre-Need Funeral Insurance has many critics -- even some within the funeral industry. The New York State Funeral Directors Association, for example, has a page on its website titled "NYSFDA is Opposed to Preneed Funeral Insurance," it lists many reasons for its opposition, including the following:

  • "There is great potential to do what is not best for the consumer because of the motivation to make commissions."
  • "These types of small policies are extremely expensive, and do not grow in order to combat inflation."
  • "If the consumer stops paying for any reason, the person loses all benefits."
  • "Pre-Need Funeral Insurance is sold in a way that leads our families to believe that it will completely pay all at-need costs even though that is rarely the case."

Instead of getting Pre-Need Funeral insurance, you can purchase a Final Expense or Burial Expense life insurance policy with little to no health questions.  The proceeds of the life insurance can then be used by your family to pay for the funeral that you have pre-planned without you having to pay everything at once.