Life insurance or preneed insurance … which one is right for you?

Read time: 4 minutes

The older we get, the more important taking care of things becomes.

Sometimes it’s that warning light on the dash that, once you take it to the shop, lets you know the gas cap was loose. Other times it’s checking in with your primary care provider on things you would’ve put off when you were younger.

The same goes for when it comes to making plans for when you die.

You want things to be neat, tidy and in order for your loved ones. But, as you know, it’s not always as simple as it seems, especially if you’re not a financial professional.

Two common ways people plan — and pay — for their final arrangements is through preplanning with a preneed insurance policy or buying a small life insurance policy.

To understand the differences and how they work, read on …

What’s funeral preplanning?

The short version of funeral preplanning is you work with a funeral home to make decisions on how you want things to go once you’re gone.

In addition to deciding the details of your arrangements, you can also pay for your services. Some people will reserve a bank account to pay these expenses. Many others will get preneed insurance.

Why some people choose funeral preplanning

It helps make things easier for loved ones. When you pass, your family and friends will be going through a host of emotions. With everything in place, they can focus on comfort and healing rather than making decisions about funeral arrangements.

It honors your wishes. No one knows how you want to be remembered better than you. When you plan your funeral, you can make sure that your funeral will be the way you wanted it. This can be a relief and bring peace of mind.

It can help save money. Preplanning can help your loved ones save money a few ways. The first is because you’ve made the arrangements, your family won’t be tempted to overspend when they’re in an emotional state. Another way is that when you preplan — including prepaying — you could pay for future goods and services in today’s dollars.

How preneed insurance works

Preneed insurance is actually a type of whole life insurance that names the funeral home as the beneficiary of the policy. Just like other insurance, there’s a premium. Premiums can be a one-time payment or in installments (monthly, quarterly, annual, etc.). Some preneed contracts will transfer if you move, some may not. For help on how preneed insurance works in your area, talk with your local/preferred funeral home.

What’s final expense insurance?

These are life insurance policies designed to help pay for final expenses. They go by a few names but tend to function the same way.

Some of the names (or descriptions) you may have seen are:

burial insurance
final expense coverage
guaranteed issue life
modified whole life
simplified issue whole life

Whatever they’re called, they tend to relate to a small face amount (death benefit) life insurance policy that’s easy to qualify for based upon policy criteria (age, for example). The benefit amounts are usually between $2,000 and $35,000 and are designed to help pay for final expenses but can be used how the beneficiaries deem fit.

Why some people choose final expense insurance

It has favorable terms. Most final expense-type policies offer guaranteed issue, permanent coverage, locked-in premiums and graded death benefits. Just pay the monthly premium on time. For some, that peace of mind is an unbeatable combination.

It’s flexible. If you want your funds to go to your family and let them choose how to spend it, this may be the route to consider. This is especially true if you want to allow for unexpected expenses such as final utility bills or transportation costs for out-of-town family members.

It goes where you are. For some, they look to retirement as the opportunity to live where they’ve always wanted. Getting a life insurance policy that’s portable and will travel with you makes sense if you’re not sure where you’ll land in the future.

So, which is best for you?

The long and short of it is … it depends. On the surface, they’re similar enough to achieve many of the same goals as the other.

But they are distinct. Preplanning with a preneed policy helps give you and your loved ones peace of mind knowing that you’ve taken care of things, from minor details to payment. A life insurance policy offers your loved ones the freedom to use the funds the way they see fit.

So ultimately, choosing between the two really depends on your preferences and situation. The good news is there’s no “wrong” choice, just different ways to help you get your final wishes as neat, tidy and in order as you can.