These days, many Americans don’t have enough funds saved up for everyday emergencies like a sudden layoff, car repairs, or a global pandemic, so taking out a life insurance policy is not only helpful to you but for any family you’ll be leaving behind when you pass away.
When you start the process of making end-of-life plans, you’ll want to have a better understanding of the different types of life insurance, so you know which best fits your needs. Read on to understand what funeral insurance and life insurance are so that you can make an informed decision.
What is life insurance?
So, what exactly is life insurance? It’s a legally binding contract between you (the policyholder) and the insurance company (the insurer). As long you keep your policy in place, your life insurance company will give the beneficiaries you name on your policy the face value of your life insurance policy or the death benefit.
To break things down a bit more, there are two main types of life insurance policies. These are term life insurance and whole life insurance.
Term life offers life insurance coverage for a set period of time, typically between 10 to 30 years, and it usually costs less than whole life. It offers the best death benefit for the price, but doesn’t pay out at all at the end of the policy.
As the name suggests, a whole life insurance policy lasts for the duration of your life. This life insurance policy has a fixed rate and earns cash value that grows over time. You can also borrow from a whole life policy when you need to. A whole life policy will likely have much higher premiums than term life, but offers a guaranteed rate of return on your cash value as well as the guarantee that the death benefit will eventually pay out.
Your beneficiaries can use your life insurance benefit to pay bills, put your kids through college, pay the mortgage, pay off your debts, and take care of costly funeral expenses. Life insurance can also supplement retirement savings.
What is funeral insurance?
Funeral insurance is pretty straightforward and more commonly known as burial insurance. You can buy this type of insurance policy to pay for funeral services, burial costs, or cremation for yourself or your family members when one of you dies.
At the time of your death, your funeral insurance policy will pay a death benefit to your listed beneficiaries so they can use the funds to pay for necessary expenses after your death and anything else that they need it for.
What is preneed funeral insurance?
Preneed funeral insurance is another version of funeral insurance where funds are set aside to cover the predetermined expenses for funeral costs. Instead of paying your beneficiaries a lump sum of money to use however they please, the funds are paid directly to the funeral company.
With preneed funeral insurance, you can work directly with the funeral company to make your own selections and discuss your final wishes precisely the way you want them. Having preneed funeral insurance lessens the burden on your family from having to pull together last-minute funds.
In some cases, this type of insurance can also protect your family from experiencing price inflation and locks in today’s prices for the future.
Which type of insurance is best?
When deciding between funeral insurance or life insurance, the choice depends on your financial needs. If your main goal is to cover immediate end-of-life costs, funeral insurance may be the better option, but if you have larger financial considerations such as outstanding debts or people who depend on you financially, life insurance is likely a better solution.