Preneed Funeral insurance, Term Life insurance, Life insurance trusts: Which is best for you?
Each of these options can aid your loved ones after your passing, but taking a direct look at their differences may help you decide which one is right for you.
By Jessica Catignani
Insurance plans purchased now can help relieve many financial burden on those you leave behind in the future. Some insurance plans simply cover funeral expenses while others provide discretionary funding for various needs in the months after you pass away.
Understanding what these options do and don’t include can feel overwhelming. If you’re considering Preneed Funeral insurance, Term Life insurance, or a Life insurance trust, you want to know the choice you make ensures the best coverage to meet your family’s needs during a difficult time. Let’s look at each option and then compare them, so you may determine which is right for you.
What is Preneed Funeral insurance?
Preneed Funeral insurance is a type of permanent life insurance that only covers funeral expenses. Also referred to as burial insurance, this type of plan is purchased through a funeral home, which serves as the beneficiary or assignee of the death benefit. At the time of your death, the policy benefit is paid to the funeral home to fund your preplanned funeral services.
To obtain Preneed Funeral insurance, you schedule a preplanning meeting with the funeral home of your choice. A funeral director presents all the options for your funeral service. The decisions you make become your funeral plan. The total cost of your decisions provides the amount of your Preneed Funeral insurance policy.
By taking this step, you remove the burden of important decisions from your family, as well as the big expenses. You also have peace of mind that the costs of your funeral choices may be “locked in” at present-day rates, depending on your contract. This can save your loved ones hundreds or even thousands of dollars from inflation. Upon your passing, the insurer pays the funeral home, the funeral you chose is provided and paid for, leaving no guess work funeral expense for your family.
Some plans, like Great Western Insurance Company’s Voyage Preneed policy, credit a favorable growth rate to the face amount of the policy or return the premiums paid as a death benefit, whichever is higher. This means the beneficiary may receive a payment for the interest that accrued on your policy.
What is Term Life insurance?
Term Life insurance, often called pure life insurance, is meant to protect your family from loss of income after your death. It does so by guaranteeing payment of a predetermined death benefit to your beneficiaries. These are designated family members or loved ones who may use the money as they wish.
Unlike Preneed insurance, Term Life insurance is temporary and expires after the specified “term” — 10, 20, or 30 years — lapses. Your policy has no cash value, so if it expires before you pass away, you don’t get back the premiums you paid. You may be able to renew your Term Life insurance policy for another term, but your premiums may increase based on your current age. Instead of terminating the policy, you may also be able to convert it into another policy or even into permanent insurance coverage.
What is a Life insurance trust?
A Life insurance trust grants title to a life insurance policy to a trust, typically a trust you or your spouse created, for your designated beneficiary. This provides legal protection for your policy and ensures the benefit funding will be used as you intended. A Life insurance trust offers flexibility if you want more oversight on how your Life insurance benefits will be used. For existing policies transferred into a trust, those policies must be held by the trust for at least three years before your death, or it becomes taxable estate for you.
When you put your Life insurance policy into a trust, you transfer ownership of the policy to the trust. Yet, you create documents that direct how the trust will use the insurance benefits upon your death. Your directions may include funeral expenses, scheduled payouts to beneficiaries, or charitable donations. You also name a trustee — your spouse, an adult child, an attorney, a bank, or another individual — to oversee the execution of your instructions.
Life insurance trusts are irrevocable in nature and generally used when the value of your estate exceeds the estate tax exemption amount (currently around $5 million). While you can place your policy in a revocable trust, you won’t gain any tax protection for your estate. An irrevocable Life insurance trust protects your Life insurance policy from becoming taxable to your estate, but it doesn’t allow changes or access to the policy to borrow against it. Irrevocable Life insurance trusts can be funded with permanent life insurance, such as a Final Expense Whole Life insurance policy, which helps ensure benefits are paid regardless of the timing of your death.
What are the differences among Preneed Funeral insurance, Term Life insurance, and Life insurance trusts?
How funds are used
Preneed Funeral insurance, or burial insurance, covers your preplanned funeral-related costs only. Term Life insurance can be used by beneficiaries for various needs, which means you have no guarantee the funds will be used for any specific purpose. You do have the option of naming your beneficiaries, such as a funeral home, for example. A Life insurance trust can also be used for various needs, but you have control — with documentation — over how funds are to be used after your death.
Preneed Funeral insurance and Term Life insurance benefits are paid directly to a beneficiary or assignee and are generally not considered income; therefore, they are not taxable, according to the Internal Revenue Service. An irrevocable Life insurance trust keeps the policy from adding to the value of your estate, protecting your estate from exceeding the estate tax exemption amount.
The impact of inflation
A Preneed Funeral insurance plan can protect the costs of your funeral expenses from inflation, if stated in your contract. Though your Life insurance trust will dictate how to disperse funds, without contracts in place, these expenses or purchases may be impacted by inflation. Since Term Life insurance doesn’t set or guarantee plans for spending of the payout, this doesn’t apply to these types of policies.
Eligibility and ease of obtaining coverage
Preneed Funeral insurance is typically the easiest to acquire, since a simple questionnaire is usually all you need to obtain first-day coverage. Term Life insurance requires a medical exam to obtain, and various areas of your life are taken into consideration for pricing. These may include your smoking status and your driving record, among others. A Life insurance trust can be set up with the help of an attorney after your insurance policy is established; applying for the underlying policy will be similar to that of Term Life insurance.
Your flexibility in making changes
Your premiums for a Preneed Funeral insurance plan never increase, and most plans can be transferred to any funeral home if you move. Term Life insurance premiums remain the same for the duration of the term but will likely increase if you renew your policy at an older age. Most Term Life insurance policies can be converted to permanent life insurance coverage, but changes to your existing policy will be dependent on your contract. Depending on the underlying policy in the Life insurance trust, your premiums may increase as well. The trust, however, cannot be changed.
How quickly funds are disbursed following your death
Benefit payouts for Preneed Funeral insurance are typically sent to the funeral home within a couple of days. Payouts for Term Life insurance may take 30 to 60 days from when beneficiaries submit a claim. Payouts from a Life insurance trust happen after the trustee files a claim; receives payment from the insurer, typically within 30 to 60 days; and then disperses the money based on your instruction.
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