Final Expense Insurance

What Is Final Expense Insurance?

Final expense insurance is designed to cover the bills that your loved ones will face after your death. These costs will include medical bills and funeral expenses. Final expense insurance is also known as burial insurance. Unfortunately, even bare-bones funerals can cost thousands of dollars. The ins and outs of insurance policies can get tricky. Here’s what you need to know about final expense insurance.

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The Basics of Final Expense Insurance

A final expense life insurance policy isn’t the same as what’s known as “insuring your life.” Insuring your life concerns leaving your family and loved ones with enough support after you pass away. Term and permanent life insurance value your policy as proportionate to your earning power now and for the rest of your life.

With funeral insurance, the value of your policy is proportionate to the expense of your desired funeral. While other forms of life insurance can top a million dollars, it’s rare for final expense insurance policies to be more than $20,000 for the face amount.

Do I Need Final Expense Insurance?

The answer to that question will vary from person to person. Do you already have term or whole life insurance? If you do, that policy can help your loved ones pay for final expenses. However, if you have term life insurance and you outlive the policy term, it’s a different story. In that case, you may want to consider final expense insurance.

Alternatively, maybe your family will have plenty of assets to work with when you die. In that case, you could use what’s called “self-insurance.” “Self-insurance” is one of those terms that sounds more complicated than it is. To self-insure is just to use your own money rather than use a life insurance payout.

Could your family self-insure for your final expenses? It’s a good idea to assume around $10,000 for funeral expenses. But don’t forget to take into account whether you will want a catered party after the service. Or perhaps a trip abroad to scatter your ashes. Maybe you’ll end up leaving big bills behind. If situations like these sound like your situation, you may want to consider springing for final expense insurance. Additionally, it’s probably best not to count on the lump sum death payment from Social Security to pick up the slack. It’s only $255.

The Pros about final expense insurance?

  1. 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.

  2. 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.

The Cons about final expense insurance?

  1. 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. The average funeral cost is around $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.

  2. 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.

  3. 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.

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.

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

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.

Self-funded burial

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.

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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.