We’ve all seen someone turn to crowdfunding in their time of need. While it’s not the ideal way to fund your final expenses, sites like GoFundMe or FreeFunder have helped many families through difficult experiences. The downside of this process is that it takes a very personal struggle and makes it rather public. Fortunately, you can protect your family from having to resort to this. With life insurance, they won’t have to worry about crowdfunding when something happens.
Inconsistent Coverage, At Best
Apart from having to ask friends and family members for donations in the form of crowdfunding, there’s another issue to contend with. You never know how much you’re going to get. Sure, you can set goals for your fundraiser, but that doesn’t guarantee an exact amount. The only way to ensure your family gets what they need is through life insurance.
Of course, it helps to know how much funerals cost, on average. Over the last 25 years, we’ve seen a dramatic increase in the cost of final expenses. Between all of the fees and services, it’s typical to pay around $10,000 to $15,000 for a pretty simple funeral. To better understand how we got that estimate, here’s a breakdown from Good Financial Cents.
Since a successful crowdfunding campaign only raises about $7,000 you may want to review your life insurance options. Even if you currently have a policy, you may need to update your coverage to ensure your family will have the amount they need to avoid financial hardships during an already difficult time.
Where Does the Money Go?
That’s a great question. While life insurance policies allow you to name beneficiaries and divvy up the proceeds as you wish, you have no such control over crowdfunding. It depends on who ultimately sets up the fundraiser—they control where the money goes. At least in part.
Part of the proceeds will go back to the site who’s hosting the crowdfunding. Different sites charge different amounts, but such fees are generally taken as a percentage of the total proceeds. Be prepared to lose up to 5 percent of your donations, or more, once you add in fees charged by payment processors.
Then the beneficiaries will have to decide how to separate the proceeds, without your input. Since the money raised from crowdfunding exists in a sort of limbo, this is where it can get messy. It’s not technically part of your estate, so any directions you included in your will won’t apply to these proceeds. In addition, the IRS hasn’t made a firm ruling where this money is concerned.
Most crowdfunding sites aren’t considered nonprofit and/or charitable organizations. Therefore, the donations that your friends and family make won’t be tax deductible. On the other side, you may also have to pay taxes on the money you receive. Thus far, the IRS has been treating these funds as “gifts.” Which are not taxable—up to a certain point. Unlike life insurance proceeds that have a tax-favored status for beneficiaries, no matter what amount you choose to leave behind.
Actually, there are multiple downsides to relying on crowdfunding to cover your final expenses. Rather than leaving your loved ones with this predicament, ask Freedom Insurance Agency for more information on your life insurance options. We can help you determine which type of policy will best meet your needs. Along with the right amount to leave to your beneficiaries. If you have more questions about how life insurance compares to crowdfunding, please don’t hesitate to contact us!