Monday, October 20, 2014

Life vs. Pre-Need Insurance

As a funeral director, I am often asked if purchasing insurance is important, and if so, should one purchase life insurance or pre-need insurance? The purpose of life insurance is very different from the purpose of pre-need insurance.

Life insurance is purchased to cover “cost of living expenses.”

Young parents may need life insurance to cover the cost of a home loan, auto loans and school loans. Purchasing life insurance protects a family’s lifestyle should a parent pass away before his or her debts are paid in full. The balance of life insurance and debt is a fine line. One does not want to over purchase life insurance as it is expensive, and the need for it diminishes each month as payments lower debt.

Pre-need insurance is purchased to cover “cost of death expenses.”

Pre-paying funeral expenses allows one to make affordable payments on funeral choices in advance of death. This process leaves one’s family free from added debt and burden at time of death. It also protects against inflationary consequences by freezing funeral goods and services at today’s prices.

When one purchases life and pre-need funeral insurance, they have responsibly protected their family from overwhelming financial burden. Most families would be unable to support their financial obligations with the loss of an adult income. Without proper insurance, this loss may cause a family to adjust their lifestyle, their standard of living and their social standing.

Another important reason for purchasing pre-need funeral insurance is the potential need for long-term care. In such a scenario, if one relies upon Medicaid, one’s assets and savings are put at risk. Pre-need funeral policies are protected from Medicaid look-backs and confiscation, whereas life insurance is not. Medicaid has rights to one's assets, savings and life insurance for five years prior to enrollment.  Upon utilization of Medicaid privileges, Medicaid will exercise its right by claiming certain of your assets and funds.  As life insurance is not paid until your death, Medicaid will lay claim, and then take possession of your life insurance funds upon your death.  Your life insurance funds will be utilized to cover the expenses you incurred for long term care.

It is possible to assign a portion of one’s life insurance funds to cover funeral expenses. This effort, however, does not guard against inflationary consequences. Funeral expenses will continue to rise along with cost of living expenses. In this scenario, persons having chosen to assign life insurance funds to cover funeral expenses, continue to suffer the rising costs of those expenses.  At time of death, one's family will need to draw upon additional funds, either out of the life policy, if they exist or out of their personal funds, if they do not.  Persons choosing this avenue, often leave their family owing large sums to cover their final expenses.  In the long run, this plan of funding costs far more than the purchase of pre-need funeral insurance.

Unlike life insurance premiums, pre-need insurance premiums do not rise with age.  Moreover, once you have paid your pre-need policy in full, monthly payments cease and your funds are held in reserve, gathering interest until your death. Additionally, by virtue of accrued interest, pre-need funeral insurance freezes the rising costs of funeral goods and services.

Perhaps most importantly, in purchasing pre-need insurance, one takes upon oneself, the horrendous responsibility of putting oneself to rest.  By far, this day will be the worst day your loved ones will ever experience.  How grateful will they be, that financial burden and potential ruin does not accompany such pain and sorrow?

The statements in this article are my opinion only. They represent my experiences in the death care business. They do not represent the opinions of the publication in which they are printed. They are not intended nor meant as legal advice.

My name is Tracy Renee Lee. I am a funeral director, author and freelance writer. I write books, weekly articles and brief tips on understanding and coping with grief. It is my life's work to comfort the bereaved and help them live on.

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