A burial insurance policy is actually a small whole life policy that builds a cash value over time, despite its name. Such a policy should not to be confused with funeral insurance products, with which a person prepays for his burial through a funeral home. Beneficiaries may use burial insurance proceeds for the deceased's debts and other death-related expenses.
Burial insurance is usually only available to applicants over a specific age, such as 45. While full medical exams aren't required, applicants may have to answer some general questions about their health. Disclosing certain conditions, such as cancer or a drug addiction, can lead to denial of coverage. Extended hospital stays, such as 20 days or more, during the past year may also prevent an applicant from qualifying for a policy.
Burial insurance is often more expensive than traditional whole life insurance policies because the applicant isn't subject to a full medical history review. The lack of review increases the insurance company's perceived risk and the higher premiums reflect this. While policy rates vary widely by insurer, coverage level and location, burial insurance polices' premium rates can be nearly 10 times the rate a person would pay for traditional whole life coverage.
Burial policies usually have a death benefit, which is a specific sum they will pay out if the policyholder dies even if the policy wasn't yet paid in full. However, if the policyholder withdrew money or borrowed against the policy before he died, the amount he took is subtracted from the death benefit. Depending on his policy rules, the insurer may charge interest on the amount withdrawn or loaned.
The insurer may not immediately issue a policyholder a full death benefit if she has increased risk, as determined by the company's underwriting polices. The death benefit goes up over time, following the insurer's schedule. For example, Jane was recently hospitalized, so her burial insurance death benefit is only 25 percent of the normal value until the amount of time set by insurer has passed, such as four years. Her death benefit may increase during years one through three, depending on her insurer's rules.
Policies may come with restrictions, such as time-limited contest clauses and suicide exceptions. The insurer doesn't have to pay out if the policyholder commits suicide and the policy has a clause regarding it. A contest clauses allows the insurer to investigate the applicant's health and cause of death if he dies within the contest period due to something he didn't disclose on the application. For example, Jane buys a policy with a one-year contest clause. She doesn't disclose the cancer on her application. If Jane dies from her illness while the clause is still in effect, the insurer will investigate and may not have to pay.
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