Is burial insurance a good idea?

I know this has been discussed before, but I still don’t know if it’s a good idea. There is a relative, disabled, receiving SSI, living in a group home. Age about 55. When he dies, he’ll have to be buried. Can we take out a policy on him? The type AARP is always advertising, or Colonial Penn? Just for $5000? Where you pay about $14 a month?

If the monthly rate is fixed at only $14 for $5000 in insurance, then I would say buy the policy. It would take nearly 30 years for that $14 a month to add up to $5000; even if you invested the $14 month in a mutual fund that averaged 7% interest it would take ~16 years to get $5000. And someone in your relatives situation (55, disabled, living in a group home) probably won’t live that long. :frowning:

Just make sure to check the fine print to make sure the monthly price is fixed.

The small print usually offers a very, very basic burial , and the obligation to buy any added burial stuff at that same company. I assume that is how they make a profit.
Does the relative have any ideas about his burial? Does he (or her relatives) take comfort in the idea of having a beautiful burial with all the works? If so, don’t insure, save up instead.

Does the relative not want to think about it and not trouble anyone with it, either? Then the policy might be a good idea, if you read the fine print.

Does the relative take comfort in being cheap, simple and of use after death? Then discuss the possibility of donating what organs are usable and donating his remains to science.

Generally, if you can afford the cost of the event (burial in the manner you wish) then don’t insure.

In the long term premium = claims + costs + tax - investment income so savings in a tax free long term product is going to produce a better result on average.

As stated previously if you insure check the premiums are fixed, assuming the payout is fixed. Also think about whether the payout is going to be enough when the time comes bearing in mind the rising costs of funerals (generally more than standard inflation). Otherwise check that the premiums are indexed in the same fashion as the payout is indexed.

Personally I have always assumed these products were for those who cared deeply about what would happen to them after death and wanted a specific service or quality (expense) of send off that they were not sure would happen unless they took out a policy themselves. If the funeral is being left to the surviving relations I would again not insure it so long as I felt I could afford the bill or could save up specifically (such savings having more utility if circumstances change).

Good luck with your decision.

Thanks for the answers. The relative in question is very low-functioning and certainly has no opinion on the matter. The family will have to dig into savings to pay for a funeral (his mother of course would want a big sendoff but she doesn’t have a lot of money!). There’s a brother who will have to pony up the most. And there’s me, who has ZERO money to kick in, which is why I was wondering about burial insurance.
Another question - would it be a good idea to call my insurance company and ask about it? Or call a funeral home and see what they say? Or should I just go and sign up with AARP or Colonial Penn…

In that case yes I would talk to multiple sources.

You might add to the list the option of taking out a life insurance policy on him to payout in the event of death only of course (no long term investment feature) - if you could find one that does not require a medical (often small value policies have this feature) it might be an option assuming your share might only be a couple of thousand bucks.

Perhaps the home can advise you, they deal with such matters all the time and have no ulterior motive.

Also, burial policies are very straight forward and can be easily compared online. Perhaps the consumers organization has done a comparison for you?

Insurance companies make money by betting the odds are something won’t happen.

The above being the case, I dont see how the insurance company could be profitable if it provided a $5000 policy for $14 per month, considering an already disabled 55 year old would have to live to age 85 just for them to break even. Check the fine print.

I understand prepaid funerals are far more cost effective, but I am not usre that helps you a lot.

It will be profitable for the insurance company. It wouldn’t be offering the deal if it weren’t.

The key point is that in any group of 55 year olds a large enough proportion will survive to 85, paying premiums all the way, to enable the insurer to pay out the sums insured to those that don’t survive.

Possibly true if the group consists of members selected at random. Much less likely if the group includes a decent number who joined because their health was determined to be well below average.

There is likely to be some fine print that closes this obvious loophole.

The loophole is the number of people likely to cancel their policy before the 30 years is up, because they or their families no longer need to worry about burial expenses. It’s the same way profit is made on whole life policies; it’s not exactly a mystery.

The principal reason families would no longer need to worry about burial expenses is that the insured died and the benefit was collected. Of those insuring sickly 55-year-olds, a lot more would end this way than with cancellation.

Don’t most policies have limited benefits for the first few years? It seems like you could do just as well to save the money you spend on the policy in an account and not touch it.

As for the above example they would be out but not all of it. If the person pays $14 a month for 10 years and dies that’s $1,680 so it’s out $3,320. So it just jacks up the rate on new customers $1.00 to cover it.

In the company where I used to work, not every deptartment was as profitable as it could be, but one extra profitable one will support the others. I imagine it’s somewhat like this

Or those who have made enough money (or whose kids have made enough money) that they no longer need an insurance policy to pay for their burial.

I’ve just run a rough profit test, and the insurer will be making very healthy profits. Based on Australian male population mortality rates and assuming:

  • 5% pa earnings/discount rates
  • 10% pa lapse rates
  • expense rates of 25% of each premium received,

the extra mortality that needs to be assumed for the poor health of the lives insured has to reach astronomical levels (approximately +200% i.e. three times normal) before the insurer starts to lose money. US mortality rates are higher than those in Australia, so there’d be a little less comfort margin, but even so, the product is still very profitable.

The key is that mortality rates are much, much lower than those implied in the premium rates for a good number of years. The sum insured is $5,000. The annual premium is $168 ($14 per month). This implies a risk premium of $0.0336 per dollar of sum insured. The actual probability of death for a 55 year old male is 0.00451 (based on ALT 2007-2009). Depending on its actual expense structure, the insurer is probably charging about 5 times the real risk rate. That’s how it makes the profit.

My point would be that there are 55-year-olds who clearly do have a chance of dying that’s fully 3 times normal. The insurance company will almost certainly have provisions that exclude, for example, folks recently diagnosed with advanced liver cancer.

Yes, that’s possible.

Alternatively the insurer may take the strategy of accepting all lives, thus reducing its underwriting costs, and rely on the huge margins in the premium rates to pay for the additional claims arising from the sub-par lives. It’s always a question of balance.

Consider a prepaid cremation.

Cheap, clean & no fuss.