A whole life insurance policy with a small death benefit called final expense insurance is simpler to get approved for. Funeral insurance, burial insurance, simplified issue whole life insurance, and modified whole life insurance are other names for final expense insurance. All of these are marketing buzzwords the insurance industry employs to promote small whole life policies with face values (death benefits) ranging from $2,000 to $50,000.
According to Richard P. Sabo, a financial advisor and authority on insurance fraud in Gibsonia, Pennsylvania, there is no difference between final expense insurance and regular life insurance other than the fact that insurers offer smaller policies to make it more affordable.
A death benefit from final expense insurance is intended to cover for costs associated with a funeral or memorial service, embalming and a casket, or cremation. The death benefit, however, is available to the beneficiaries for any use, including everything from paying taxes to traveling.
According to Sabo, the final expense insurance is marketed to older individuals who are beginning to consider their funeral expenses. They are given the impression that purchasing it is necessary in order to provide for their families. “Do they really need a new policy when some people already have existing life insurance policies that can be used to cover final expenses?” If a person has already paid for their funeral expenses, he continues, final expense insurance may be unnecessary in that circumstance as well.
KEY LESSONS
- A small whole life insurance policy that is simple to qualify for is marketed as “final expense insurance.”
- A final expense life insurance policy’s payout is available for use by the policy’s beneficiaries in any way.
- The death benefit typically ranges from $2,000 to $50,000.
- What is the Process of Final Expense Insurance?
- Consider the scenario where you have retired, lost your employer-provided life insurance, and don’t have a personal life insurance policy. Additionally, you lack a comfortable nest egg and worry about the financial burden your demise will place on your spouse and/or children.
You make contact with a life insurance agent to begin the application process, which entails providing basic health information. Because of your age and health, the premiums are unaffordable despite the excellent death benefit. Unfortunately, they don’t offer insurance policies with death benefits low enough to make the premiums affordable. You might give up at this point and conclude that you cannot afford life insurance.
Cons
- Some insurance insurers include contradictory or false information in their marketing materials (this is also true for other types of life insurance).
- Some insurers’ marketing materials about these policies contain insufficient information (also true for other types of life insurance).
- You might lose money if you live a long time and pay more in premiums than your beneficiaries will receive in death benefits due to the policies’ low death benefits. When you pay term premiums but do not pass away while the policy is still in effect, you also lose money.
- Some people let their insurance policies lapse, so their beneficiaries won’t get a death benefit (also true for other types of life insurance).
- Some final expense insurance insurers play on seniors’ worries about burdening their loved ones by using marketing scare tactics based on high average funeral costs.
- Even though they may be eligible for better coverage, some insurers steer customers without serious health issues toward more restrictive and expensive policies.
Pros
- Policies are available to applicants with poor health.
- The application process doesn’t include a medical exam, only a questionnaire and prescription history at most.
- On many policies premiums never increase (this is true for many types of life insurance).
- The insurer cannot decrease your policy’s death benefit unless you borrow against the policy’s cash value or request accelerated death benefits (also true for other types of life insurance).
- Your heirs can use the death benefit for any purpose (again, a standard feature of life insurance).
- The death benefit is guaranteed as long as premiums are paid and you don’t have a term policy (also a standard feature of any whole life insurance).
- The death benefit is not taxable (also a standard feature of life insurance).
- You can buy a policy with a death benefit of $50,000 or less, and that’s all some people need or can afford.
Contents
The basics of final expense insurance
The premiums of final expense insurance are determined by your age, health, and, where permitted by state law, your gender, just like any other type of life insurance. For a given amount of insurance, your rates will increase the older and less healthy you are. Due to their shorter average life expectancy, men typically pay higher rates than women. Additionally, if you don’t smoke, you might be eligible for a lower rate depending on the insurer. From birth to age 85, some insurance companies offer final expense policies. However, there might be a minimum age (like 45) and a maximum age (like 85) at which you can apply, depending on the policy and the insurer. The maximum death benefit that you can choose might be smaller as you age. When you’re under 55, policies may go up to $50,000, but once you hit 76, they only go up to $25,000. Some insurers give all applicants, regardless of age, the same maximum death benefit.
As was already mentioned, a type of whole life insurance is final expense insurance. In terms of permanent life insurance, whole life policies are fairly simple to comprehend. Once you purchase a policy, neither the death benefit nor the premiums can change. A whole life insurance policy does not end when you reach a certain age, unlike a term insurance policy. A whole life insurance policy also builds cash value that can be used for borrowing, though any loans that are still outstanding at the time of your death will reduce the amount that your beneficiaries receive.
When you apply for final expense insurance, you won’t have to submit to a medical examination or grant access to your medical records to the insurance company. You will need to provide some health-related information, though. Not everyone will be eligible for a policy with coverage starting on day one due to the health requirements.
A Special Form of Final Expense Insurance Is Guaranteed Issue
Only policy policies without a medical exam, medical records request, or medical questions will be acceptable to applicants with serious health issues. Benefits are always subject to a two- to three-year waiting period with these guaranteed issue policies.
The beneficiaries won’t get the policy’s death benefit if the insured passes away during the waiting period. However, they will be given back their premiums plus interest, which is typically charged at a rate of 10% annually.
Read our article on guaranteed issue life insurance for more information on these policies, including how life insurance companies are able to afford to sell them.
As of April 1, 2020, New York Life will market to seniors in partnership with AARP a term life insurance policy offering $10,000 to $50,000 in coverage. Although the coverage amount is comparable to that of a final expense policy, this term policy has increasing premiums and an 80-year expiration age.
Your final costs or any other monetary requirements your beneficiaries may have may not be covered by a policy that could expire prior to your passing. Contrast the final expense policies mentioned in this article with senior term insurance.
Example of Final Expense Insurance in Real Life
We discovered using Choice Mutual’s online quote tool that a $25,000 final expense insurance policy with health questions and immediate coverage for a 68-year-old man in California could cost between $156 and $180 per month, while one without health questions (a guaranteed issue policy with a waiting period) could cost between $234 and $345 per month.
Let’s say a man only qualifies for a guaranteed issue policy with a two-year waiting period because he has congestive heart failure. After two years, he will have spent $8,280 on premiums if he purchases the most expensive policy with a $345 monthly premium. If he passes away between the first day of year three (when the waiting period expires) and the end of year six, when the premiums paid will be roughly equal to the death benefit, his beneficiaries will benefit.
Healthy customers shouldn’t purchase from a company that only offers guaranteed issue policies because they will pay an unnecessary premium premium and their coverage won’t begin right away.
According to Sabo, they might not even want to purchase a final expense policy. The restriction is that you must be in sufficient health to be eligible. According to Sabo, a $25,000 guaranteed universal life insurance policy in California could be purchased for about $88 per month by a 68-year-old nonsmoking male. This policy offers less protection than a whole life policy because it would expire at age 100. If you’re determining whether a trade-off like this is worthwhile, you should consider your own health as well as your financial situation.
Like whole life, guaranteed universal life does not expire as long as you purchase a policy that covers the remainder of your life. If you’re looking to save money and don’t need coverage after, say, age 90, you can purchase a policy that will cover you until age 121 for maximum protection, or to age 100, or to a younger age. Considering that there is no cash value component, it is less expensive than final expense insurance.
A Case for “Regular” Life Insurance
You would be better off buying regular life insurance, according to Sabo, if you can afford to purchase a larger policy to satisfy the minimum death benefits required by your employer.
Martin concurs. He claims that the majority of insurance companies demand traditional whole life or term insurance have a minimum face value of $50,000 to $100,000. Even though the cost per $1,000 of coverage is less than that of a final expense policy, the higher face amounts will result in premiums that some people will not be able to afford. Many of his clients, he claimed, who would be good candidates for traditional whole or term policy, opt for final expense because they only need $20,000 or $30,000 in coverage, and claims on these policies are frequently settled more quickly than those on larger policies.
According to Sabo, a lot of life insurance companies have increased their minimum death benefits to $50,000 because it is not worthwhile to spend the time processing applications and conducting full underwriting for smaller policies. In order to sell fewer policies and generate smaller profits, some companies that specialize in final expense insurance have developed systems and underwriting, according to the expert.
Graded Benefit Final Expense Insurance is an intermediate option
A graded benefit policy with a part-waiting period is the third kind of final expense insurance. In the event that the insured passes away during the first year that the policy is in effect, this kind of policy may pay out 30 to 40 percent of the death benefit, and it may pay out 70 to 80 percent in the event that the insured passes away during the second year that the policy is in effect. After the first two years, the policy would pay out the full death benefit if the insured passed away.
Instead of a guaranteed issue policy, you might be eligible for a graded benefit policy if your health issues are only moderately serious. Congestive heart failure, cancer in remission within the previous 24 months, and treatment for alcohol or drug abuse within the previous 24 months are a few examples. In contrast, you would only be eligible for a guaranteed issue policy if you had a more serious condition, such as a terminal illness, cancer that was being treated at the time, or recent heart surgery, and you would have to wait at least two years for any coverage.
According to Martin, no one insurer provides the best final expense insurance overall. Get quotes from several insurance companies to determine which ones view your health the most favorably. You’ll most likely receive the best rates from those companies. Another strategy to reduce rates is to attempt to qualify for a policy that includes health questions.
Even if you give a less-than-ideal response to a health question, not all employers will pass you up. A graded benefit policy, a guaranteed issue policy, or immediate coverage may be offered by some with higher premiums.
Sometimes it makes the most sense to select the least expensive policy for which you are eligible. However, if you are working with a seasoned life insurance broker who sells policies from a variety of insurance companies rather than an agent who only sells insurance from one company, your broker may be able to advise you on which companies are easiest to work with. According to Martin, some companies offer applicants and policyholders better service than others. Having said that, some people will be forced to select the least expensive choice, even if it has subpar customer service.
