Simply stated, funeral insurance is a life insurance policy designed to pay for your funeral, burial, and other "final expenses." Funeral insurance is also called burial insurance, final expense insurance, or preneed insurance. These policies are all essentially the same thing, but there are some differences, and we'll explain those to you. For simplicity, let's call it funeral insurance.
It's worth bearing in mind that funerals are particularly costly events that can cause financial strain for your family. The cost of funerals these days can run into thousands of dollars, but it depends on the choices you make, as with anything. Taking out funeral insurance can help deal with this cost, giving peace of mind.
According to a 2018 Finder.com.au survey, the average cost of a funeral in Australia is $7,449, making them a financial commitment for your family once you have gone. One of the main problems they may face is that they will want to create the best send-off possible for you but maybe worried about the financial restrictions.
With Funeral Insurance, you pay a regular premium for your funeral insurance policy. When you die, your family gets a lump sum, usually paid within 24 hours of receiving the valid claim. Check out our extensive list of Melbourne Funeral Services to help you arrange a funeral for your loved one
How Much Does Life Insurance Cost?
The cost of life insurance varies significantly depending on several different factors. One of the biggest cost factors will be the type of life insurance you buy. For example, a term life insurance policy is significantly less expensive than a whole life insurance policy for the same amount of coverage.
Here are some of the most common factors affecting life insurance rates:
- Age. The younger you are when you buy a policy, the less you'll pay. That's because your chance of death is smaller.
- Sex. According to the National Centre for Health Statistics, females have a life expectancy that is nearly five years longer than males. This means that men generally pay more for life insurance than women (except in Montana, where insurers must provide gender-neutral life insurance rates).
- Health. Your health has a major impact on your life insurance rates. The insurer will evaluate your past and current medical conditions to calculate your life expectancy.
- Lifestyle. Your driving history (such as a DUI conviction), criminal record, and dangerous occupations and hobbies (such as scuba diving) can all result in higher life insurance rates.
How Does Life Insurance Work
Life insurance is a very common asset that figures into many people's long-term financial planning. Purchasing a life insurance policy is a way to protect your loved ones, providing them with the financial support they may need after you die. For example, you may purchase life insurance to help your spouse cover mortgage payments or everyday bills or fund your children's college education.
When purchasing life insurance, it's important to understand how it works and how your beneficiaries can receive the proceeds of your policy. This can help with choosing a payout option that works best for your estate planning goals. Here at Peter Tziotzis Orthodox Funerals, we provide religious and traditional funeral services.
Life insurance is a type of insurance contract. When you purchase a life insurance policy, you agree to pay premiums to keep your coverage intact. If you pass away, the life insurance company can pay out a death benefit to the person or persons you named beneficiaries of the policy.
Some life insurance policies can offer both death benefits and living benefits. A living benefit rider allows you to tap into your policy's death benefit while you're still alive. This type of rider can be beneficial when you're terminally ill and need funds to pay for medical care.
"Some life insurance companies have designed policies that allow their policyholders to draw against the face value of the policy in the event of a terminal, chronic or critical illness. These policies enable the policyholder to be the beneficiary of their life insurance policy," says Ted Bernstein, owner of Life Cycle Financial Planners LLC.
When purchasing life insurance, it's important to consider:
- How much coverage you need
- Whether a term life or permanent life policy makes more sense
- What you'll pay for premiums
- Which riders, if any, you'd like to include
In terms of coverage amounts, a life insurance calculator can help choose a death benefit. Term life insurance covers you for a set term, while a permanent life insurance policy covers you for life as long as premiums are paid. Between the two, term life tends to be cheaper, but permanent life insurance can offer benefits such as cash value accumulation.
Main Types of Life Insurance
Term Life Insurance
According to the Insurance Barometer Report, in addition to being the most affordable type of life insurance, term life insurance is the most popular type of life insurance sold (71% of purchasers).
Term life insurance provides coverage for a certain amount of time, and the premium payments stay the same amount for the duration of the policy. Typical choices are policy lengths are 10, 15, 20, 25 or 30 years.
If you pass away within the term of your policy, your beneficiaries can make a claim and receive the death benefit money tax-free.
Once the term of the policy expires, you may be able to renew the coverage in increments of one year, known as guaranteed renewability. But each year of renewal will be at a higher rate.
Permanent life insurance
Permanent life insurance provides lifelong coverage. It's more expensive than term life because it:
- It can last for the duration of your life.
- Usually builds cash value.
The cash value component accumulates on a tax-deferred basis over the life of the policy. It acts as a savings portion of the policy. Typically, you can borrow against the policy's cash value or make a withdrawal. If you decide to end the policy, you can get the cash value minus any surrender charge.
In some policies, the cash value may build slowly over many years, so don't count on having access to a lot of cash value right away. Your policy illustration will show the projected cash value.
There are several varieties of permanent life insurance:
- Whole life insurance offers a fixed death benefit and cash value component that grows at a guaranteed rate of return. Many whole life insurance policies payout dividends that can be used to reduce premium payments or can add to your cash value.
- Universal life insurance often offers more flexibility than a whole life insurance policy. You may be able to alter your premium payments and death benefit within certain limits. With a universal life insurance policy, the cash value will build depending on the policy type. For example, an indexed universal life insurance policy will have cash value tied to an index like the S&P 500. A variable universal life policy will typically have investment subaccounts that you can choose and manage.
- Burial insurance is a small life policy with a small death benefit, often between $5,000 and $25,000. Burial insurance is designed to cover only funeral costs and final expenses.
- Survivorship life insurance or "second to die life insurance" ensures two people under one policy, usually a married couple. When both spouses have passed away, the policy pays out the death benefit to the beneficiaries. Usually, survivorship life insurance is part of a larger financial plan to fund a trust or pay federal estate taxes.
How to Choose a Life Insurance Policy Type
With all of the life insurance options available, it may seem complicated to choose the right one.
Start by deciding between term life and permanent life insurance.
Consider a term life insurance policy if you need life insurance for a specific amount of time. For instance, if you want insurance to cover your working years as possible "income replacement" if you were no longer around.
Term life insurance is also a good choice if your budget is limited. Since term life insurance provides protection for a specific amount of time, and it's not a cash value life insurance policy, the rates will be lower than permanent life insurance.
As you enter different stages of life, your life insurance needs may change. The options will depend on your policy and insurer. Many term life insurance policies are convertible to permanent policy. Term life conversion allows you to switch to a permanent policy without re-applying or taking a life insurance medical exam.
If building cash value is important to you, look at permanent life insurance options. But suppose you're purchasing a permanent policy only to capitalize on the cash value accumulation, depending on the policy. In that case, you're better off putting your money into a savings or investment vehicle, so you're not paying for the life insurance and charges within a permanent policy. On the other hand, a permanent life insurance policy will last for the duration of your life.
And cash value isn't typically intended for beneficiaries. Upon death, any cash value generally reverts to the life insurance company. Your beneficiaries get the policy's death benefit, not the death benefit plus cash value. That said, some policy types will offer the death benefit plus cash value, but for a higher price.
What Are The Benefits Of Life Insurance?
Most people understand the primary benefits of having life insurance: Your family gets the money if you die unexpectedly – and you get the reassurance of knowing they'll have resources to help carry on without you. While those benefits are generally true for all kinds of life insurance, other important advantages depend on the specific type of policy and the amount of coverage you get. There are also benefits for women too. Need help in planning a funeral service? Check out Peter Tziotzis Orthodox Funerals in Melbourne.
All life insurance can give you financial confidence that your family will have financial stability in your absence. But generally, the more life insurance you have, the more benefits it will provide to your family when needed. For example, some people receive a nominal amount of life insurance – say $25,000 – through their workplace. While that theoretically sounds like a nice sum of money, it may only be enough to cover funeral expenses and a few mortgage payments in practice. But with a larger coverage amount, your family can realize far more benefits, such as:
- Income replacement for years of lost salary
- Paying off your home mortgage
- Paying off other debts, such as car loans, credit cards, and student loans
- Providing funds for your kids' college education
- Helping with other obligations, such as care for aging parents
Beyond your coverage amount, different kinds of policies can provide other benefits as well:
- There are tax advantages of life insurance because death benefit payouts are generally tax-free. Some policies have features that can help transfer money to heirs with fewer tax liabilities.
- Some policies have a cash value that accumulates over time and can be used to pay premiums later or even tapped into to help live on in retirement.
- Life insurance can often be bundled with other types of protection, such as disability insurance to replace a portion of your salary if you're unable to work.
- Many policies have valuable "riders" or contractual provisions that provide benefits before death.
How to get more benefits – and value – when buying life insurance.
Generally, the most cost-effective way to buy life insurance is to do it when you are younger and healthier. Life insurance companies generally give younger customers lower rates for reasons that are easy to understand:
- They tend to have a longer life expectancy.
- They are less likely to have been diagnosed with a serious disease.
- They are likely to pay premiums over a longer number of years.
Not in your twenties anymore? Don't worry. There are still a lot of affordable options. But if you want to get the most value out of each premium dollar, it pays to do your homework and figure out exactly what you want from your coverage. Most policies have riders that can add worthwhile benefits for a relatively small added amount. Two of the most popular riders include:
- Accelerated death benefit: This rider can help pay for needed care of a diagnosed chronic or terminal illness. While this can be very useful in a time of need, you should also know that funds paid out will typically lower the death benefit paid to your family.5
- Disability waiver of premium: This valuable rider gives you the ability to stop paying premiums if you have a disability while keeping your coverage.6
There are other kinds of riders you should know about as well, so talk to an experienced professional – like a Guardian financial professional – before deciding to purchase one policy or another. You should also find out about other ways to control your policy costs, including:
- Purchasing a joint policy for you and your spouse
- Getting insurance at group rates through your employer
- Purchasing a whole life policy that accumulates cash value which can be used to reduce monthly premium costs later