Posted on August 29, 2017 by Rachel Zeldin
Final expense insurance is one of several options for preplanning and paying for a funeral or memorial. Though there is a lot of information on the internet about final expense insurance, it can still seem overwhelming and confusing. If you’re wondering if it’s a good option for you, we’ve asked our friends at RedBird Advisors to break down the basics of funeral insurance products and outline the Pros and Cons so you can decide if it’s right for you.
Final expense insurance is a type of low face amount life insurance designed to cover the costs of an individual’s “final expenses,” such as funeral services and products, loans, legacy planning needs, and other outstanding bills.
There are 2 main types of coverage an individual can qualify for based on a short health interview.
Level Benefit: This is the type of coverage that will pay the full life insurance benefit starting immediately upon approval.
Graded Benefit: "Graded benefit" means there were some concerns with the health interview over pre-existing conditions, and that the life insurance benefit will pay out on a reduced basis the first 2 years. For example, if you have a $10,000 final expense policy approved as a graded benefit, many companies will pay out 30% of the 10,000 if you die in year one, 70% in year 2 and 100% in year three. Different companies have different payout schedules, so it’s important to fully understand before making any purchase decisions.
Both types of plans listed above offer up to $25,000 in final expense coverage. Some final expense companies have age restrictions that would reduce the total amount you can apply for. For example, many companies will not allow graded benefits to exceed $15,000 for applicants over the age of 70. So, it’s important to have detailed discussions with your final expense agent or final expense company representative.
The average cost of a final expense policy is around $40-$50 per month for roughly $10,000-$12,000 in coverage. Due to the low monthly premiums, some people often refer to final expense as “affordable end-of-life insurance”.
Final expense insurance is typically less expensive than a pre-paid funeral arrangement which can easily be $200-$300 per month or more or full term life insurance.
Most individuals will qualify for coverage and if the policy is under $25,000 there are no medical exams required for approval, regardless of your health condition (though you must pass a medical phone questionnaire and background check with most final expense companies).
You can use the insurance money/policy at any location - it’s not fixed to a particular funeral or cremation provider or packages of services and products. This is particularly useful in case you’ve moved to a new location, the provider you thought you’d work with is out of business or under new management, or you’ve changed your mind on final disposition and funeral preferences. This type of flexibility is one of the strong points of using final expense to fund your funeral as you have full control and ownership of your policy.
Final expense policies are owned and controlled by you or your trustee. This means the funeral home is not the beneficiary. This is important to point out in the scenario when a funeral might cost less than originally planned. In that scenario, the remaining death benefit would remain with your family to use at their discretion. You have full control.
Unlike pre-paid funeral contracts, funeral costs are not fixed or “locked in” and will vary as time goes on and by funeral provider.
If you decide to stop paying the premiums, there is a chance your policy will not accumulate cash value and the money you put in can not be recuperated.
It’s possible that over your lifetime you will pay more in monthly premiums than what the policy is worth. This is especially true if you live a long time.
TIP: Ask if the plan you’re considering is “capped.”
There may be a lag between when you submit the paperwork for the claim and when you receive the money. If the funeral or cremation provider requires payment up front, you will have to cover the expenses until the policy pays out.
According to CSG Actuarial, the cost of a $20,000 final expense insurance policy in 2016 was between $42 and $49 per month. These rates are based on a 55-year-old female, so compared to other pre-paid options, it is an affordable option for funeral expenses.
Final expense policy amounts range from $1,000-$50,000, according to your funeral planning needs. A $1,000 plan meets the needs of those wanting a basic cremation and a $50,000 plan would represent a full service funeral with assumed cost of living adjustments and additional estate planning needs.
According to the National Funeral Directors Association (NFDA), the average cost of a full service funeral is roughly $12,000, including funeral home and cemetery expenses, a headstone or grave marker, and other third party charges, which is well within the limits of most of final expense policies on the market.
With the increase in costs year over year, it’s important to consider inflation when purchasing a final expense plan as well as other estate planning needs since the cost of funeral is not fixed at the time you purchase your insurance policy.
Below are some common examples of funeral expenses that should be considered when choosing how much final expense insurance to purchase:
Funeral home services
Transfer of the body
Opening and closing fees
Luncheon or other gathering post-funeral
Credit cards balances
These are just a few examples. More complex funerals can include many other services, and can be included when determining your policy amount. It’s important to take the time to make sure you’re covering all your bases when making your purchase decision.
If you decide that this type of prepaid funeral product is right for you, we highly recommend that you gather several general price lists from your local funeral homes to see range of costs and get a better idea of what a funeral could cost in your area, based on the services and products you’ve selected. This will make it easier to determine how much final expense coverage you need in order to stay within your budget.
Below are the most common insurance products used for end-of-life planning:
1. Whole Life (WL) – Often referred to as “permanent insurance”, this is the type of insurance that builds cash value and allows you to borrow against the value of the policy.
Whole life insurance will accumulate cash value which can be accessed through policy loans should you need the money.
2. Guaranteed Universal Life (GUL) - GUL is a form of permanent life insurance and very similar to whole life.
This type of insurance will stay in force as high as age 121, assuming premiums are still being paid.
GUL policies are not designed to build cash value and cannot be borrowed against, therefore, they can be much cheaper than traditional whole life policies.
3. Guaranteed Issue (GI) – Guaranteed issue life insurance is life insurance that doesn’t require health questions and anyone can qualify. Guarantee issue life is typically designed as a whole life product.
The devil is in the details!
Because products can vary widely between insurance companies, shop the various options to ensure you get the best coverage possible.
For example, too many times we have seen where a consumer could have received a better policy for less money if their agent would have done a better job of identifying the specifics of their health condition. A good rule of thumb to follow is the more health questions you’re willing to answer, the cheaper the policy will be. So, if you want to buy cheap burial insurance, make sure your agent is asking you all the health questions.
Tip! It’s important to shop final expense life insurance with an independent agent who isn’t restricted on the companies they can offer vs. going with an agent who only represents one company, potentially restricting the type of coverage you can qualify for.
Underwriting is very different with final expense vs. fully underwritten life insurance. You can get approved for a policy by simply answering a few medical questions. Below are some of the common questions asked when applying for final expense:
Are you currently confined to a bed, nursing home or assisted living facility?
Are you taking oxygen to assist your breathing?
Do you have an aneurysm that has not yet been repaired?
Have you been diagnosed with kidney disease?
Are you currently receiving dialysis treatment?
Have you ever been diagnosed with Alzheimer’s disease or dementia?
Are you terminally ill?
Do you have AIDS, or HIV?
Are you diabetic? Insulin dependent or oral medication? When were you diagnosed?
Have you been treated for cancer in the last 12-24 months?
Have you been treated for heart attack or stroke in the last 12-24 months?
Do you have congestive heart failure or cardiomyopathy?
Are you dependent on a wheel chair?
Have you been convicted of a felony?
Do you have liver disease?
Applying is a simple process.
Step 1: Set an Appointment with an Independent Agent.
Finding an independent agent is an important step in the purchase process of final expense. The reason we suggest an independent agent is due to their ability to represent many of the top life insurance companies. This is important because they can navigate the various companies and, based on the underwriting requirements, can find an affordable solution for you.
Step 2: Choose your final expense policy from a highly-rated company
Funeral expense insurance can be purchased from many different companies. Make sure the company is rated A- or better by A.M. Best, the primary rating company that reviews the financial strength of life insurance companies.
Step 3: Answer the health questions and complete the phone interview
By now you have completed the final expense application with your agent and it’s time for the phone interview with the insurance company. Most final expense companies require a compliance interview at the point of sale to ensure the agent covered all the required detail in their presentation and that you have answered all questions.
The company will then run a medical background check which is referred to as an MIB check and prescription drug check. This ensures the answers to your health questions align with what is on record with your medical history.
These interviews usually take only 15 minutes and you’ll have an approval or decline by the time the call is finished.
Step 4: Choose how to pay for your premiums
Final expense can be paid the following ways, which you’ll pick when you’re with your agent:
Direct Monthly Bill (Not all insurance companies allow this)
Direct Quarterly Bill
Monthly EFT (direct withdrawal from your bank)
Credit or Debit Card (Not all insurance companies allow this)
Tip! You are not required to pay your initial premiums the same day you sign up for final expense insurance. For example, you meet with your agent on the 18th of the month, but do not want to start paying on your policy until the 1st of the following month. Insurance companies will allow policy holders to future date their initial payments by up to 30 days. If you’re agent says you must make the payment effective immediately, you should respectfully decline and find a new agent.
Step 6: Receive the policy and store it in a safe place
Insurance companies are very quick when delivering final expense policies.
One of the big differences between traditional life insurance and final expense is that most final expense companies send policies directly to you vs. requiring your agent to complete the delivery. This eliminates lost policies or delays when an agent may not be in your area to deliver the policy in a timely manner.
This ensures you get the policy and can store it accordingly for your beneficiary.
Step 7: Communicate your end-of-life plan to your beneficiary
It’s vital to communicate with your assigned beneficiary (i.e. your spouse, next of kin, or designated funeral agent) the details of your policy. Currently, there is more than $7 billion dollars in unclaimed life insurance payments. For this reason alone, you want to make sure your beneficiaries not only know about the policy but also know what company it’s with and can easily access a copy of the plan for reference.
Many of the final expense companies offer free “final wishes and requests” booklets which allow you to outline all the details for your beneficiary. If you didn’t receive one with your policy, you can simply call the insurance company and they will gladly send one to you. You can also fill out and share My Funeral Wishes at Funerals360 to outline your end-of-life preferences and let your next of kin know where they can find your policy information.
End-of-life planning is something most people do not want to talk about and often put off until it’s too late. It’s either due to discomfort in discussing death with their family or they believe the costs associated with planning are outside of their budget.
Final expense planning doesn’t need to be a long and painful process and setting up financial benefits for your funeral doesn’t have to complicated or expensive.
Final expense insurance is just one of the many ways to pay for a funeral. If you’re interested in other ways to pay for funerals, you can check out our article library to read more paying for a funeral, pre-need policies, or funeral trusts.
About Drew Gurley
Drew Gurley is a partner with Policy Zip, a nationally licensed insurance agency supporting individuals and families in the senior market. Drew is also a co-founder of Redbird Advisors, a national insurance marketing organization which trains independent agencies on burial planning, medicare supplements, and other life insurance areas. His work has been featured in Forbes, Huffington Post, Inc, Think Advisor (Formerly Life Health Pro), and many other media outlets.
Drew is singularly focused on improving consumer education to impact the insurance purchase experience.