Final expense insurance is a type of life insurance designed to cover funeral and burial costs, plus other end-of-life expenses. Most people don’t want to leave loved ones with the financial burden of paying for a funeral or dealing with medical bills, and final expense insurance is marketed to cover just that. But does everyone need it?
In this article, we’ll answer frequently asked questions about final expense insurance and explain the pros and cons of purchasing this type of policy. Plus, find out what other options you have to help protect your loved ones’ financial security.
FINAL EXPENSE INSURANCE FAQs
Q. What type of insurance is final expense insurance?
A. Final expense insurance is whole life insurance. That means the policy remains in force for the duration of your life, provided premiums are paid. It pays out a guaranteed death benefit to your beneficiaries, tax free.
Q. Is final expense insurance the same as burial insurance?
Q. Who needs final expense insurance?
A. Although final expense insurance sounds like a good thing for everyone to have, you really only need it if you don’t have sufficient insurance coverage elsewhere and/or don’t have enough savings to cover funeral costs and end-of-life expenses.
Q. Is final expense insurance hard to qualify for?
A. No, final expense insurance is usually easy to qualify for, even if you have some health issues, because policies are small.
Q. Do I need a medical exam?
A. Final expense insurance doesn’t typically require a medical exam. However, you will need to fill out a medical questionnaire as part of the application process. The medical questionnaire will likely ask about your health over the past two years and may include questions specific to diseases like cancer, heart attack or stroke, congestive heart failure, diabetes, HIV/AIDS, Alzheimer’s or dementia. It will also likely ask about any prescription medications you take.
Q. Is final expense insurance expensive?
A. Because coverage amounts are small, premiums for final expense insurance are less than premiums for traditional whole life insurance, ranging from $30/month to over $100/month. However, for the amount of coverage you get, final expense insurance is considered more expensive. In other words, you pay less but you also get less for your money.
Q. Will my premium go up as I get older?
A. Most final expense policies have level premiums, meaning once you purchase a policy, you’re locked into that price for life and it won’t go up. However, the longer you wait to purchase a policy, the more expensive your premium will be.
Q. When is the best time to purchase final expense insurance?
A. The younger and healthier you are, the better final expense insurance rates you’ll receive. Some insurance companies will issue policies to any age group, but others only issue policies if you’re over a certain age, like 55 or 65. Insurance companies may also cap applications at a certain age, like 85.
Q. How much is the death benefit?
A. The death benefit of a final expense policy varies, based on how much coverage you want and how much you are approved for. Most insurance companies cap final expense policies around $50,000. Average end-of-life expenses are around $20,000, but it’s beneficial to check in your area to get prices for funeral costs and consider what arrangements you’d like so you have a clearer picture of how much coverage you’ll need. Also keep in mind that funeral costs and end-of-life medical costs are rising, and you’ll need to account for inflation.
Q. How soon will my policy pay out to my loved ones?
A. Final expense insurance, like all forms of life insurance, is not subject to probate. Policies are paid out quickly after you pass away, usually within a few weeks. Money passed down through a will or estate, on the other hand, may be subject to probate and can take months to process.
Q. What can the death benefit be used for?
A. Although the death benefit of a final expense policy is usually spent on funeral and burial costs and medical bills, your beneficiary may choose to spend it however they wish. Some people use final expense insurance money to help pay taxes like an estate tax, to pay outstanding debts, or to cover living expenses while they take time off work to grieve.
Q. Do final expense policies earn cash value?
A. Because they are a type of whole life insurance, final expense policies may earn cash value. But because the policies are small, cash value accumulates very slowly and usually isn’t significant.
Q. Can I borrow from my insurance policy?
A. If your policy has accumulated cash value, you can borrow from your final expense insurance policy in the form of a tax-free policy loan. You’ll be charged an interest rate on your loan, but you determine the payback terms. Any unpaid loans will be deducted from your death benefit when you pass away.
Q. Can I add insurance riders to my final expense policy?
A. Yes, you can add insurance riders, or supplemental insurance coverage, to your policy. Common riders include accidental death, disability riders and chronic or terminal illness riders. These allow you to access your death benefit while you’re still living or increase the death benefit payout when you pass away, and can be added for a small fee. Some riders are included at no additional cost, but vary by insurer.
Q. Can I buy final expense insurance for someone else?
A. Yes, you can buy final expense insurance for anyone with whom you have insurable interest. This means you would be financially impacted by their passing. It’s common for adult children to buy final expense policies for their parents or to buy policies for their own children. Often, when buying final expense insurance for children, you have the option of transferring ownership of the policy to them when they reach adulthood. It’s also possible to add a child insurance rider onto your own whole life insurance policy that covers all your children under the age of 18.
FINAL EXPENSE INSURANCE ALTERNATIVES
If you don’t qualify for final expense insurance but need coverage, you may still be eligible for other types of policies designed to cover funeral costs and end-of-life expenses. These policies are called “guaranteed issue” and “graded benefit” life insurance. You may also look into pre-paid funeral options called pre-need insurance.
Guaranteed issue and graded benefit life insurance policies are both whole life insurance policies that don’t require a medical exam or medical questionnaire. They are designed for people who have one or more serious health conditions that may disqualify them from other types of insurance coverage. Because the insurance company has little to no information about the health of the policyholder, it’s hard to accurately assess the risk of insuring them. Therefore, guaranteed issue and graded benefit policies are more expensive than standard final expense insurance.
Here’s a closer look at the differences between the two:
Guaranteed Issue Life Insurance
Insurance companies who issue guaranteed issue policies protect themselves against risk by not paying out a death benefit in the first 2-3 years the policy is issued. Should you pass away during this time, it doesn’t necessarily mean your beneficiary gets nothing. Usually the insurance company will return any premiums you paid, plus interest, to your beneficiary. If you outlive the waiting period, your beneficiary should receive the policy’s death benefit in full at your passing.
Graded Benefit Life Insurance
Insurance companies who issue graded benefit policies protect themselves against risk by only paying out a percentage of the death benefit in the first 2-3 years the policy is issued. For example, if you pass away in the first year the policy is in force, your beneficiary may only receive 30% of the death benefit. If you pass away in the second year, they may receive up to 60%. If you pass away in the third year, the insurance company might pay out 90%. Once the graded period has passed, your beneficiary should receive the policy’s death benefit in full at your passing.
Some funeral homes offer pre-paid options called pre-need insurance. This option can help take a lot of stress off your loved ones, knowing that arrangements have already been made and that they align with your wishes. However, pre-need insurance often lacks the security of a whole life insurance policy, as these types of policies aren’t heavily regulated. If the funeral home closes or you move out of state, you could lose your money.
PROS & CONS OF FINAL EXPENSE INSURANCE
Before you seek out a final expense insurance policy, here’s a quick overview of the pros and cons of owning this type of life insurance:
- Easy to qualify for, even if your health is less than ideal
- More affordable than traditional whole life insurance
- Level premiums for life
- Death benefit is guaranteed if premiums are paid
- No probate means loved ones receive money quickly
- Death benefit is tax free
- Death benefit can be used to cover funeral costs and end-of-life expenses
- Death benefit can be used to pay down debt or taxes
- Death benefit can be used as income replacement for loved ones who take time off to grieve
- Policies typically aren’t large enough to cover large debts or long-term income replacement
- The ratio of cost to coverage is more expensive than other types of insurance
- Guaranteed issue policies don’t pay out a death benefit if you pass away in the first 2-3 years the policy is in force
- Graded benefit policies only pay out a percentage of the death benefit if you pass away in the first 2-3 years the policy is in force
- Cash value accumulates slowly compared to whole life insurance policies structured for growth
- If you outlive your life expectancy, you could end up paying more in premiums than your policy is worth
WHY IT PAYS TO PLAN AHEAD
If you’re young and healthy, there are significant advantages to buying a whole life insurance policy structured for growth, also known as a Wealth Maximization Account™. With a larger face value, this type of policy allows you to leave a greater financial legacy to your family. The cash value of the policy also accumulates faster and can generate cash flow to use in retirement. Unlike some final expense policies, there is no minimum age requirement to purchase a policy. In fact, the earlier you purchase, the better your premium will be—and you’ll lock in that premium for life.
Even if you’re approaching retirement or already retired, it may be beneficial to seek out a whole life insurance policy with a larger face value instead of final expense insurance, if you’re in good health. Policies can be used as a volatility buffer against future market downturns, helping protect retirement funds, and can be used to help avoid estate taxes. You can even structure a policy to be paid in one lump sum.
Although whole life insurance structured for growth costs more than final expense insurance, the amount of coverage you get for your dollar is greater. And, when purchased through a mutually owned life insurance company, you’ll also earn potential dividends which can be used to pay policy premiums. Although not guaranteed, the top rated mutual life insurance companies in the United States have historically paid out dividends for over 100 years.
If you’re concerned with leaving your loved ones with the burden paying for your final expenses, whether you’re young or in retirement, a Paradigm Life Wealth Strategist can help you find the right financial strategy for you and your family. Virtual consultations are always free and we’re happy to meet on your schedule, day or night. With over 14 years of experience working with whole life insurance products from top-rated insurers, we can customize an insurance solution for your goals and budget. Click to schedule a free consultation with a Wealth Strategist today.
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