Final expense insurance is a whole life insurance policy with a small death benefit and lower qualifications for approval. It is also known as burial insurance and funeral insurance and is typically a simplified issue policy.
Final expense life insurance is just like other permanent life insurance policies except the death benefit is small, typically $2,000 to $50,000. The policy is purchased to cover funeral and other end-of-life costs.
In this post we will cover the basics of final expense and if it may be a good fit for you.
Key Takeaways:
- Final expense insurance is a small death benefit, whole life insurance policy.
- It is also known as funeral expense and burial insurance.
- Final expense is generally simplified issue underwriting, meaning you don’t need a medical exam or to give fluids
- The purpose of final expense is to pay for a funeral service, casket or cremation, obituary, flowers, and any lingering medical or nursing home bills. This way your loved ones aren’t burdened with your final arrangements.
- However, there is no limit to what your beneficiaries use the money for.
- The typical final expense policy ranges from $2,000 to $50,000 and the average funeral is $7,000 to $12,000.
What Is Final Expense Life Insurance?
Final expense life insurance is a type of permanent whole life insurance. A benefit of whole life insurance is at the time of purchase you know what your premiums will be and what your death benefit is. Neither of which will change over time. And unlike term insurance, permanent whole life never expires so your loved ones will get a payout no matter how long you live.
Another benefit of permanent insurance is the cash value account. A portion of each of your premiums funds a cash account that is your money. If needed, you can take a loan against it, withdraw it, or surrender your policy and take the whole amount (minus any surrender charges). This cash value account grows at a crediting rate set by the insurance company too.
However, due to the small face amount, final expense does have a small cash value. Additionally, any time you access your cash value account you may reduce the death benefit your loved ones receive upon your passing.
Understanding Final Expense Life Insurance
Final expense life insurance generally does not require full underwriting. Most policies are simplified issue. This means you only have to answer some health questions, but won’t need a full medical exam or providing your medical records.
(Want to learn more about underwriting and the basics of life insurance? Read ‘A Beginners Guide To Life Insurance’ here).
The downside of simplified issue underwriting is there is a chance you may get turned down based on your answers. But final expense is primarily sold to older and potentially less healthy individuals so the possibility of getting approved is relatively high.
Like all life insurance, your premium will depend on your age, gender, tobacco use, product & underwriting, and health. The older, less underwritten, and less healthier you are, the higher your premiums will be. And males tend to have higher premiums than a similar female.
Most final expense is sold to people aged 45 to 85, but some carriers sell products with minimum ages as low as birth.
Lastly, there may be lower death benefits offered the older you are. For many products, a young person can get a policy up to $50,000, but older individuals may be limited to half that.
How Does Final Expense Life Insurance Work?
The typical purchaser of final expense life insurance is someone who is retired or near retirement age. They will be losing coverage through their employer and want an individual policy.
However, when shopping for policies the cost is too high due to your age, health, or budget.
Final expense was designed to fill this gap. The smaller death benefit allows for lower premiums while still offering an amount to cover your final arrangements. No one wants their death to be a financial burden to their loved ones.
Insurance companies designed their final expense products for these cases. They have priced the products assuming an older and less healthy population.
The smaller coverage amounts may not be enough to leave an inheritance, but they are designed to cover the bills that come with a funeral.
Different Types of Final Expense Insurance
The most common type of final expense coverage is a simplified issue final expense product. However, there are different types of the product out there.
1) Guaranteed Issue Final Expense Insurance
First, guaranteed issue final expense insurance is a type of final expense where you are nearly guaranteed to be approved. Some guaranteed issue products only have a few questions to confirm you aren’t actively dying.
However, these polices do tend to come with a 2 or 3 year waiting period before benefits are paid out. If you die before the waiting period is up, you only receive a return of premiums with interest. Although, the annual interest rate is typically high and in the 10% range.
2) Graded Benefits on Final Expense
A second alternative version of final expense uses a graded benefit. These policies typically only pay around 1/3 of the death benefit if you die in the first year and 2/3rds if you die in the second year.
For example, if you get a $9,000 face amount and die in the first year, your beneficiaries get $3,000. If you die in the 2nd year your beneficiaries receive $6,000. And if you die in the 3rd year or later you would get the full $9,000.
If you have less serious health conditions, you could apply for a graded benefit as the payout on your death will be higher than the return-or-premium plus interest of the guaranteed issue policy.
For example, if you are 24 months out from cancer or heart failure, you can likely get a graded death benefit. But if you are less than 24 months out, you may only qualify for the guaranteed issue.
Final Expense Life Insurance vs. Pre-need
A competitor to final expense life insurance is pre-need or pre-paid funeral plans. Pre-need plans are purchased directly from a funeral home that you want to handle your arrangements. The funeral home will price out your service and you pay the cost ahead of time.
Pre-need plans help you lock-in the majority of your funeral costs. If you pay for your service at $2,000, but when you die the funeral home is charging $2,500, your family doesn’t owe the difference.
Since each funeral home has their own packages, the cost of a pre-need plan will vary greatly from location to location.
This differs from final expense insurance where all customers get similar pricing from the insurer.
The biggest drawback from pre-need plans is that the benefit doesn’t go to your beneficiaries, but to the funeral home. With a final expense product, your beneficiaries get the death benefit and can spend it how they want. This is particularly beneficial if you have large hospital bills at the end of your life and no other insurance or savings to cover them.
Benefits And Drawbacks of Final Expense Insurance
Like all insurance products, a final expense policy comes with a list of benefits and drawbacks.
The Pros of Final Expense Life Insurance
There are a list of positives of final expense life insurance, and these include:
- Alleviate Financial Concerns – You don’t want your grieving family to also deal with the financial burden of a funeral
- Affordability – due to the low face amount, the premiums are low
- Constant Premiums – once you have your policy, the premiums are locked-in
- Constant Death Benefit – the coverage remains the same
- Insurability – your coverage can’t be canceled, even if your health declines
- Flexibility – The death benefit is targeted to funeral expenses, but can be used for any financial concerns of your beneficiary
- Avoids probate – probate is an administrative pain, but life insurance tends to avoid probate
- Cash Value Account – you are able to borrow or withdraw from your cash value account
- Eligibility – Most people can qualify for version of final expense
- Tax-advantaged – The death benefit is not taxable typically
- Often come with living benefit riders for additional customization
Cons of Final Expense
Final expense does come with some drawbacks:
- Low Death Benefit – the policy size is small making it a poor way to pass on wealth
- High Relative Costs – Although the nominal premium is low, the premium relative to the coverage tends to be high
- Graded Benefit or Waiting Period – The alternative types of final expense (guaranteed issue and graded death benefit) come with low coverage in the early years.
- If you live long enough, your total premiums may exceed your death benefit
Is Final Expense A Good Fit For You?
If you are well-off, have sufficient savings & investments and adequate regular life insurance, then final expense is typically not a good fit for you. Although, some people still choose to buy a final expense policy to help specifically for funeral costs.
If you are unable to get regular life insurance, final expense may help alleviate the financial burden your death may have. The costs of funerals and related expenses are rising and taking care of this one item for your grieving family may be important to you. The average funeral is $7,000 to $12,000 not including a casket, transport, embalming and other prem.
Final expense can help pay for these funeral costs.
Social security does offer a death benefit, if you qualify, but it is only $225. So final expense is a way to fill the gap.
The Final Word
Final expense insurance can provide meaningful protection to your loved ones after death, albeit at a smaller amount. Your beneficiaries can use the money for your funeral and to pay off any debt your incurred.
Since final expense insurance is affordable due to its low coverage amount and easy to qualify for, it is a great option for those who are underinsured or with little savings.
Frequently Asked Questions (FAQs):
Final expense life insurance is a permanent whole life product with a low death benefit. These products are sold to cover funeral costs and other end of life expenses. They have a cash value account like all whole life products. They also have looser underwriting standards allowing for coverage even if you have pre-existing medical conditions or are too old to qualify for other products.
Final expense insurance if purchased through an insurance company and pays a benefit to your named beneficiaries. Whereas a pre-need plan is purchased from a funeral home and covers your funeral costs only. This means that pre-need plans don’t allow for discretionary spending of the benefit for items like outstanding debt or accounting & legal fees. Also, pre-need plans don’t allow for choosing the funeral home.
In general, regular life insurance is a better relative product as the cost per unit of coverage tends to be lowers and the coverage amounts tend to be higher. However, final expense has lower requirements and those who may not qualify for regular insurance are good candidates for a final expense product.
Final expense life insurance is affordable due to its low coverage amounts. The cost of final expense can be as low as $50 a month on $10,000 of coverage for retirement aged individuals. But it varies based on age, health, tobacco-use, gender, and what product you choose.
Final expense life insurance is paid out to your beneficiaries and they can use it however they want. Typically, the product is purchased to help cover the costs of:
1) Funeral and related expenses
2) Out-of-pocket medical bills incurred at the end of life
3) Legal and accounting costs like probate