Life insurance is a great option if you need income replacement – you want your loved ones to be able to make mortgage payments, afford college, and so on even if you aren’t around to continue earning a paycheck. But what if you’re older or already retired and you don’t have those concerns anymore? There’s still one big cost you should be aware of: your burial. If you’re looking for insurance that you can specifically use to cover the actual cost of your death, final expense insurance is an option worth looking into.
What is final expense insurance?
Final expense insurance is most often a type of permanent life insurance used to cover medical costs and other end-of-life expenses, most often funeral and burial costs including services, items (like a casket and hearse), and/or cremation.
Permanent life insurance does not expire and is more expensive per unit of coverage than term life insurance, which runs for a specified amount of time before ceasing. Permanent life insurance remains in force for as long as the premiums are paid.
Permanent life insurance policies carry a cash value. This value builds up over the life of the policy, similar to an investment, and is paid out as part of the death benefit when you die. You can also cash out the policy for part of its value after a certain amount of time.
Final expense insurance has a lot in common with guaranteed issue life insurance. Unlike traditional life insurance policies, which require an investigation into your health – including a paramedical exam – guaranteed policies don’t require such in-depth research and applicants will often be insured after answering only a few questions.
Some funeral homes will accept an assignment of the insurance policy payout. This means that the proceeds will go directly to the funeral home to cover the cost of the funeral. (The beneficiary will receive any money over the cost of the funeral.) When you’re making arrangements, make sure to ask about this and don’t assume that the funeral home will accept this sort of payment method; some funeral homes require payment upfront and won’t wait until the final expense insurance policy pays out.
What alternatives are there to final expense insurance?
Traditional life insurance
Traditional life insurance is a good substitute for final expense insurance if you’re relatively young and healthy. This type of policy is offered by virtually every life insurer. You can pay premiums for a permanent life insurance policy, as described above, or get a term life insurance policy, in which you’ll pay premiums for a set amount of time (say, 30 years) before the policy runs out and you’re no longer insured.
Traditional life insurance requires a paramedical exam; because the insurer has a better idea of your health, they’re able to provide a much more accurate quote for your premiums, and this often comes at a cheaper price than final expense insurance. Because of this, traditional insurance is almost always the better choice, financially speaking.
However, there may be instances where traditional life insurance is not a feasible option. If you’re old or in particularly poor health, it might not be possible for you to pass a paramedical exam and get insured. Additionally, because an assessment of your health must be made with these policy types, there’s an application time of between a few weeks and a few months. If you need insurance more quickly, a final expense policy is a better bet because it will offer coverage within a few days.
Final expense insurance is often targeted at the elderly who might not otherwise be able to afford their burial. If you’re financially prepared for retirement, though, you may have the money you need already. Of course, this approach is a long game, and it’s not something you can decide once you get old – it needs to be something you’ve already been working on so you can invest and have your money grow.
Guaranteed issue life insurance
As mentioned, final expense insurance has a lot in common with guaranteed issue life insurance. It removes a lot of the health-related nuance of traditional life insurance, such as the paramedical exam, which means you’ll get covered much more quickly and in circumstances where you might not otherwise. However, you’ll usually pay a lot more in premiums than you do with other insurance types.
Pre-need insurance is a type of permanent life insurance offered by funeral homes. It’s essentially a very specific type of final expense insurance, which covers the costs of predetermined services. One of the benefits is that you’ll get all of your funeral concerns out of the way early, know what it’ll cost, and know how you’re going to pay for it. However, setting up these plans so far in advance comes with it’s own downsides, as a lot can change in the interim (like the funeral home changing ownership) and you won’t have that premium money to use for other purposes (investment, for instance, which will net you a much greater return and can be used for funeral payments once you actually pass).
Pre-need funeral trust
A pre-need funeral trust serves the same purpose as pre-need insurance – money to be used specifically for funeral expenses – but rather than the funeral home waiting for the insurance policy to pay out, you contribute to a trust that accrues interest over time. These can be a cost-effective way to fund your funeral, but the interest is typically taxable and they’re irrevocable so they’re difficult to modify.
What’s good about final expense insurance?
Final expense insurance is relatively affordable if you’re on a tight budget. It typically doesn’t provide as much coverage as other insurance (more on that later), but if you only need enough of a payout to cover burial costs, rather than a payout for long-term expenses, it could be enough for your needs.
It provides peace of mind in regards to funeral expenses being covered. With a traditional insurance policy, your dependents are using that death benefit for every expense: mortgage, college, everyday living, and so on, in addition to funeral costs. With final expense insurance, you and your beneficiaries know what the money is supposed to be used for, taking much of the stress out of planning your burial.
What’s bad about final expense insurance?
Compared to other types of policies, final expense insurance offers relatively low coverage – averaging $5,000 to $25,000. That might cover all of your needs, but funerals are expensive. Transamerica puts the average funeral cost at just north of $8,000; that’s just for the funeral, not including headstone, cemetary plot, end-of-life medical expenses, and anything else that might come up.
Relatedly, there are other, more cost-effective ways to plan for your death. Traditional insurance is cheaper for the amount of coverage you can get, and investing money provides a financial return that you don’t get with final expense insurance.
Final expense insurance is meant to be used for funeral expenses, but the beneficiary isn’t technically (or legally) required to do so. The death benefit can be used for whatever they wish. Policyholders normally don’t name someone a beneficiary unless they explicitly trust him or her, so this hopefully won’t become an issue, but keep it in mind when you’re deciding who you’re putting in charge with your money. This is especially true for policyholders of final expense insurance; they typically skew older in age and may not have trusted people like a spouse or siblings to name as their beneficiary.
Is final expense insurance worth it?
The bottom line: funerals are expensive, and it’s important to make sure all of your costs are covered. Regardless of how you save, you need the money. Ideally, you have some other life insurance coverage that provides more of a payout, or you’ve invested enough on your own to cover funeral expenses. One of these options should be your "Plan A" (and the other should be your "Plan B").
If you haven’t, though, and you’re looking for any sort of protection against the high cost of a burial, final expense insurance can provide that protection, even if it isn’t the most cost-effective way to do so.
Image: Todd Lappin