Pre-need insurance – what it is and why you might need it

By Bob Atoo
June 15, 2016

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In certain situations it might be useful to be able to determine future events before they happen and make the necessary alterations/arrangements to your life’s path prior to said event taking place.

Think for example of passing your all-important exams to ensure you get that university place you crave. Or passing the driving test that will give you the freedom you desire. Or go on that first date which will blossom into the perfect romance. Or play the lotto on this one occasion as you’ve got more than just a hunch.

But of course back in the real world we haven’t got the luxury of clairvoyancy, nor have we got ready access to a time-travelling police phone box; whilst predictive sports almanacs really only belong in Hollywood blockbusters.

The thing is some things are inevitable and don’t require forecasting. Like taxes and our own demise, according to that old adage; both of which are inescapable facts of life for pretty much everyone on the planet.

That said most of us are unaware of the precise time and place where we’re destined to meet our maker. Having said that, if we were we would make the effort to ensure that everything was prepared, at least financially (if not emotionally) for the biggest of big send offs. The last thing we want would be for our surviving family members (or indeed, children) to have to stump up for funeral costs, especially as they continue to spiral year-on-year. Which goes to some lengths to explain exactly where pre-need insurance comes into play. That’s right, pre-need insurance policies.

Arguably one of the most important insurance policies you’ve never heard of (although big in America, it’s probably headed this way sooner or later). And for those of you aware of its very existence, you still may not understand what it does or moreover how it does what it does. A bit like electricity in some ways. It’s all around us but we haven’t got the foggiest just how it got there, where it comes from and quite how it powers out kettles. But don’t worry, as we’re here to put you in the picture as to what pre-need insurance is and how it might benefit you and your family sometime in the future. So we suggest you read on……

What is pre-need insurance is?

Well, essentially, it’s a type of life insurance policy which covers the insured party for the cost of expenses which quickly accumulate once they/people generally pass on (i.e, funeral home services, church expenses, floral arrangements, cremation and/or burial, the wake, headstones, etc…). All of which are typically pre-determined, financially-speaking.

In a nutshell the predominant purpose of pre-need is to offset the costs historically associated with the death of an individual. And ostensibly to set aside the necessary funds BEFORE the need arises, therein protecting loved ones/nearest and most dearest from having to fork out, whilst at the same time safeguarding the accrued financial assets belonging to the deceased.

A big deal in America and elsewhere in the world, it’s still worthwhile knowing what’s what, as pre-need insurance might well be more readily available here in the UK one day soon.

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What’s the difference between pre-need insurance and conventional life insurance policies?

Traditional life insurance plans offer a broad range of future financial needs for those who survive the policyholder once they pass away, often providing an income, covering outstanding education costs, helping to pay-off a mortgage and so on and so forth.

Pre-need insurance in contrast is specifically designed to extend coverage to a funeral, cremation or burial of the insured party. Aside from this – and with direct reference to the distribution of benefit at the time of death – and pre-need insurance may well be available/payable to an assigned party (a pre-elected funeral director/home for the most part) with immediate effect, and upon the policyholder’s death.

Compare this with the several weeks it can sometimes take a life insurance policy provider to pay-out once the insured party is no longer in the land of the living to note another key variant.

Isn’t funeral pre-planning primarily for the older generation?

Not necessarily. Pre-planning or pre-arranging one’s funeral makes a lot of financial sense at any given time, and for anyone keen to relive the pressures on their immediate family regarding difficult choices and avoidable expenses at an unknown later date. Plus by doing it as and when the policyholder sees fit means that they side-step making emotionally challenging arrangements when under the added pressure of either unforeseen illness or circumstance.

Furthermore there may well be financial advantages to prefunding a funeral at a younger age. Failure to prepare and prepare to fail, as they say.

Do I actually require pre-need insurance or could just fund my funeral costs via other sources?

Pre-need insurance is by no means a necessity, but as a choice many people make it’s definitely one which can make a deal of sense from the outset. Admittedly some people may prefer to simply put a set amount of money into a savings account or trust as and when they can, yet paying directly into a pre-need insurance plan ensures that the funds will be distributed to the right parties at the right time; rather than being divided up from a non-specific bank account when the times comes.

What’s more, all of the funeral services pre-selected by the policyholder may be completely covered by a dedicated insurance policy of this nature if your funeral home has guaranteed the price of your funeral.

In addition to this tax liability might be avoided too, in terms of envisaged death benefits to surviving family members. And there’s the possibility that there may be limited (or no) underwriting required should you apply for a pre-need insurance plan, with decisions normally arrived at very quickly.

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What does the pre-planning of a funeral entail?

Funeral pre-planning (or pre-arranging) comprises of meeting with a funeral pre-planning professional to document the type of funeral (or cremation) service the would-be policyholder would prefer, including the type of casket, concrete vault or cremation urn. Once this part of the process is agreed and finalised, the individual can fund their funeral expenses with a pre-need insurance policy.

How much does pre-need insurance cost?

This typically depends on the cost of the funeral services chosen during the pre-planning process described above.

With it relating specifically to your insurance payments, you have the option of making a single payment or alternatively selecting a plan which provides insurance coverage over a passage of pre-determined time whilst you make regular payments; much in the same way as any other insurance policy protocol and practice. Premiums also vary according to the policyholder’s age at the time they take out the pre-need insurance cover.

Are there any tax issues related to pre-need insurance?

It’s common practice for pre-need insurance benefits to be paid as a lump sum to the funeral home, leaving no notable tax consequences to a policyholder’s family. However it’s always advisable to speak with a tax advisor to establish any potential tax implications based on specific individual situations.

So where does my money go?

Pre-need insurance premiums are normally paid into policy providers who use this amount to pay their own expenses and establish reserves, which are subsequently used to fund future claims benefits when they come to fruition.

In theory the death benefit (as such) is orchestrated in such a way as to grow over a period of time to assist covering the rising cost of funerals, while at the time of death the benefit is then duly paid to the nominated funeral home once they’ve delivered the services rendered.

Finally, how do I go about making a claim and how long would this process normally take?

To set things in motion in terms of filing a claim, the family of the deceased needs to contact the chosen funeral home, who in turn will then handle all the documentation and correspondence with the pre-need insurance policy provider. the claim is processed, after which the funds will be electronically transferred to the funeral provider.