Save Big By Planning For The Inevitable With A Funeral Policy

It’s not something we like to talk about. Death. But you should have a funeral policy set up for your beneficiaries. 

Why would you want to expend emotional and mental energy to plan for your inevitable death? 

A funeral policy saves your beneficiaries the hassle of dealing with thorny legal and financial questions while they're mourning your passing. A good plan protects your heirs' time and money and frees them up to navigate the difficulty of dealing with your death. 

What Needs to Happen When You Die?

Some actions need to happen when you die so that your life insurance policy pays out the death benefit to the appropriate beneficiaries. Here is an attenuated list: 

  • The client and agent must make a claim
  • The beneficiary must provide proof of identity
  • A certificate of death must be issued
  • Carrier investigation

Guarantee Results With An Urgent Claim

For a death benefit to pay out, there must be a claim. No one notifies your insurance agent of a policyholder's death. That's why your beneficiaries must be aware that they are and are in a position to make a claim. 

Here is a list of items that you and your beneficiary should have access to so that the claim is as painless as possible: 

  • Copy of the insurance policy and policy number
  • Your personal information:
    • Legal name
    • Date of birth
    • Social Security Number

Quick And Easy Proof Of Identity

Your beneficiary should have all the documents they need to make a claim. The next step is to provide proof of identification. Typically, a state-issued ID and a passport are the most convenient and best proof of identification.

Monumental Importance Of The Certificate Of Death

certificate of death is an official, legal document issued by a medical professional that states when a person died. Your beneficiary must send the death certificate with the beneficiary's claim. Generally, there will be an investigation, which can take an extended time, anywhere from two days to three months.

When you get the certificate of death, you'll want to get 10-15 original, certified copies from the medical examiner, the state, or the coroner, depending on who issues the certificates. You'll need these original, certified copies to send to: 

  • Insurance carriers
  • Banks
  • Other accounts with assets

The Truth About Carrier Investigations

Once the insurance carrier gets the claim and the certificate of death, they also conduct an investigation. This investigation can vary in time; usually, it takes between 2 weeks and 6 months. 

Timely Access To The Death Benefit or Funeral Policy

From the time you die to the time the death benefit pays out may take several months. When the money is ready, it can be delivered in two ways: directly to the beneficiary or through the insurance agent acting as an intermediary. 

The better option is for the check to come directly to your beneficiary. An insurance agent may unduly influence someone who is grieving, emotional, and just inherited a sum of money. When your beneficiary gets the death benefit, it may be large enough that they need to consult a financial advisor to manage the funds. 

Life Insurance Funeral Policy Timeline

  • Death certificates can take from 2 days up to 3 months
  • Agent submits a claim with needed documentation 
  • Carrier investigation can take from 2 weeks to 6 months 
  • 90% of all death benefit claims settle within a month

Your Beneficiary Got Funeral Policy Money; Now What? 

The beneficiary can use the money at their discretion. Once the beneficiary gets the funds, there can be claims against the proceeds. Some examples of claims that your beneficiary might have to deal with: 

  • Probate court
  • Liens
  • Creditors

You can mitigate this risk with purposeful estate planning

What Is My Beneficiary's Tax Burden? 

The death benefit payout is tax-exempt, so your beneficiaries will pay no taxes on the principal amount. 

Suppose that your beneficiary receives the death benefit and then invests the money. Any subsequent gains on the principal are taxed. 

Another way that your beneficiary might pay tax is with the nature of the policy's purchase. If you bought the policy using a corporation and wrote off the taxes as an expense, the beneficiary will have to pay taxes on the death benefit. 

Key Differences: Prepaid Funeral Vs. Final Expense Policy

The median funeral cost in 2021 was $7,848, and the average funeral cost is $9,914

PrepaidFinal Expense
Deals directly with the funeral homeDeals with the actual insurance carrier
Discounts of 10% to 15%Discounts of 50% to 80%
Paid in full before deathPays out as fast as 3 to 5 days

Final expense policies cost about $3,000 to $5,000 and provide about $10,000 to $20,000 in coverage, and you pay a monthly premium or a single payment. 

What Is A Modified Endowment Contract (MEC)?

A whole life insurance policy has two components: the premium that funds the death benefit and the policy's cash value. 

When you buy a life insurance policy, you pay your premium. If you overpay the premium, the IRS no longer considers it a life insurance policy; instead, it becomes a modified endowment contract

A modified endowment contract might be a valuable way for your to protect your money: 

  • It grows on average by 8% annually
  • There is no cap on how much you can contribute
  • The principal is protected from the market losses
  • It's tax-deferred: acts like an annuity when you're alive and a life insurance policy when you die 
  • It offers the same protections as standard life insurance policies 

Key Takeaways

No one wants to think about dying, but you want to leave behind a legacy and generational wealth for your heirs. To ensure their future, you should plan to use all means available to you. One aspect of estate planning is a life insurance policy. 

Here are the key things you need to do to prepare your beneficiaries for your eventual passing: 

  • Make sure that your beneficiary understands that they need to submit a claim once you die
  • Collect all relevant documentation and share it with your beneficiary
  • Go over the importance of the death certificate with your heirs
  • Prepare the beneficiaries for the carrier investigation
  • Consider purchasing a final expense policy rider
  • Decided if a modified endowment contract might be suitable for you

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Last Updated: 
October 12, 2022

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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