You may have seen ads on TV and elsewhere for guaranteed life insurance, which is sold specifically designed to provide coverage for funeral or burial expenses.
Such a policy may seem alluring, given the typical funeral and burial in the United States now costs $7,000 to $10,000, and so represents an expense that many families may be hard-pressed to cover. Also, unlike most other life-insurance options, funeral insurance has no health requirements for eligibility; even those with terminal illnesses can qualify for this coverage so long as they can continue making payments on the premium.
However, don’t sign up for a guaranteed life insurance policy before you consider its significant drawbacks.
The premiums are very high. Compared with most other forms of life insurance, guaranteed-life policies have much higher premiums. When issuing a funeral-insurance policy, companies take on a higher risk by insuring people with a shorter life expectancy; the premiums are priced to reflect the likelihood that policyholders may pay in for fewer years than with a typical life-insurance policy.
As with other forms of life insurance, premiums are calculated depending on the age and gender of the potential insured, so the older you are when buying funeral insurance, the more expensive the premiums become. With some companies, notably Colonial Penn, the cost of premiums is by “units” that correspond to a certain level of coverage. For example, each unit may represent $1,000 of coverage and cost $10 per month per unit for a 65-year old man. As a result, for such a person, a funeral insurance policy with a death benefit of $10,000 would cost $100 per month. That may be considerably higher than the average cost of a term life-insurance policy with a higher level of coverage.
Coverage only kicks in fully after two years. Most guaranteed life insurance policies also provide a graded benefit in the first two years the policy is active--meaning that if a policyholder dies prior to that milestone date, the company will simply refund the annual premium, plus interest on the payments.
There are better options for many. Adequate, or any, life insurance should be a part of everyone’s financial plan. While a guaranteed life insurance policy leaves those otherwise ineligible to apply for other policies with an option to cover all or some of their funeral expenses, it is not the best choice for a healthy individual, nor does it take advantage of the unique benefits life insurance provides.
Because guaranteed-life insurance provides just enough to cover funeral expenses -- if that -- there’s nothing left over to be used as a gift for loved ones or to help pay down debts. This insurance is a wise buy, then, if it’s the only policy you qualify for because of bad health. For almost anyone else, these policies leave much to be desired and leave you exposed to a coverage gap.
A better option, if you’re young and healthy enough to qualify for insurance, is to choose a term-life policy, an insurance option that offers a death benefit for less than is typical with whole-life insurance, which also includes an investment component. That said, a whole-life policy may be a wise buy for some people, notably the very wealthy, who can make it part of a large and well-balanced portfolio of investments.