Does Life Insurance Cover Funeral Costs?

Term vs. whole life vs. final expense: which covers a funeral?

All three are types of life insurance. The difference is whether the policy will still be there when it is needed.

For a deeper side-by-side, see burial insurance vs. life insurance. For pre-need plans, see pre-need insurance.

Does term life insurance cover funeral costs?

Only if the person dies while the term is active. A term life insurance policy covers a set period, such as 10, 20 or 30 years. When the term ends, coverage stops, and the policy usually has no cash value, according to the NAIC.

That is a common way "we had life insurance" turns out to be untrue for a funeral. A policy bought at 45 with a 20-year term ends at 65. Many term life insurance policies can be renewed, but usually at a much higher price each year.

Example (hypothetical): A man bought a 20-year term life insurance policy at age 50. He dies at 74. The term ended at 70, so the policy pays no benefit, and his family uses other ways to pay for the funeral.

If you own a term life insurance policy, check its end date. Ask the insurer whether it can be converted to a permanent life insurance policy before it expires, and until what age.

How does life insurance pay for funeral expenses?

Here is how a payout usually reaches the family:

1. The beneficiary contacts the insurance company and asks for a claim form.
2. The beneficiary sends the completed claim form and a certified copy of the death certificate. The funeral home usually helps order death certificates.
3. The insurer reviews the claim. If the death happened during the first two years of the policy, the insurer may review the original application more closely. This is called the contestable period.
4. The insurer pays the beneficiary, often by check or direct deposit.
5. The beneficiary pays the funeral home and any other bills.

The money belongs to the beneficiary. It does not have to be spent on the funeral. That is why it helps to tell your beneficiary what you want the money used for, and to choose someone you trust.

The IRS says life insurance proceeds paid because of the insured person's death are generally not included in the beneficiary's income. Any interest paid on top of the benefit is taxable.

The timing problem: funeral bills vs. insurance payouts

A funeral usually happens within days of a death. Many funeral homes ask for payment, or proof that payment is coming, before the service. An insurance claim takes time to be paid, and can take longer if paperwork is missing or the policy is in its contestable period.

Families handle the gap in a few ways:

• Pay first, get repaid later. A family member pays from savings or a card and uses the insurance money to cover it.
• Assign part of the benefit to the funeral home. See the next section.
• Plan ahead with final expense insurance. Small final expense insurance policies are designed with funeral costs in mind. Ask any insurer how long claims usually take.
• Keep a payable-on-death account. The FDIC explains that money in a payable-on-death account passes directly to the named beneficiaries when the owner dies.

Assigning a life insurance policy to a funeral home

Many funeral homes accept an assignment. The beneficiary signs a form that tells the insurance company to pay part of the death benefit directly to the funeral home. The rest still goes to the beneficiary.

• The funeral home usually checks with the insurer that the policy is active and the amount is enough before accepting it.
• Not every funeral home accepts assignments, and some add a fee. Ask up front.
• Only assign the amount of the funeral bill. Ask for an itemized statement first. The FTC Funeral Rule gives you the right to one.
• Policies that are still in their contestable period, or have a waiting period, may not be accepted.

Some people also set up an assignment while alive, as part of a prepaid funeral arrangement. Rules for these arrangements vary by state, and the FTC notes that state protections vary widely. Ask your state insurance department before signing. See prepaid funeral plans.

Common issues to plan for

If a family thinks a policy exists but can't find it, the NAIC runs a free Life Insurance Policy Locator. You enter details from the death certificate, such as the Social Security number, legal name, and dates of birth and death. Participating insurers search for life insurance policies and annuities. If one is found and you are the beneficiary, the insurer contacts you directly. If nothing is found, you will not get a reply, so keep searching papers and bank records in the meantime.

Naming a minor as beneficiary. The NAIC notes that insurers may not pay a benefit directly to a minor child. If you want a grandchild or child to benefit, ask about naming a trust or another option, and name an adult you trust to handle funeral costs.

What happens if there is no life insurance?

The family still has options, and they are not usually on the hook for the person's other debts.

• Money in the person's estate can pay funeral costs. The CFPB says debts are generally paid from the estate, and family members are generally not responsible for them unless they co-signed, held a joint account, or another exception applies, such as certain spousal rules in some states.
• A surviving spouse or eligible child may get Social Security's one-time $255 payment. See Social Security death benefits.
• Eligible veterans may qualify for VA burial benefits. See veterans burial benefits.
• Some states, counties and cities offer limited burial help for families who can't pay.
• Choosing direct cremation or immediate burial can lower the bill a lot.

Every realistic option is in our guide on how to pay for a funeral.

Which option fits you

• You have a whole life insurance policy that will last: it may already help cover your funeral. Check the amount and the beneficiary.
• You have term insurance that ends soon: consider whether you need a small permanent life insurance policy for final costs. See burial insurance for seniors.
• You want a small benefit meant for final costs: final expense insurance is designed for this. See what final expense insurance is.
• You want to lock in a specific funeral: a pre-need plan with a funeral home may fit, but know that it is tied to that provider.
• You have enough savings: a payable-on-death account may be enough, with no premiums.

Questions to ask a Licensed Insurance Agent: Will this policy last for my whole life? Is there a waiting period? How long do claims usually take to pay? Can my beneficiary assign part of it to a funeral home? Use our coverage calculator first to estimate how much you need.