What is Final Expense Life Insurance?
Final Expense life insurance is a type of whole life insurance that is specifically designed to cover an insured’s final expenses such as funeral expenses, medical bills, or unsettled legal debts. Since this type of policy is specifically targeted to cover small, end-of-life expenses, it is usually offered at lower policy amounts, likely between $5,000-$35,000.
While most companies offer final expense insurance, the way each policy works may differ slightly from company to company. Final Expense insurance may also be called burial insurance, funeral insurance, or pre-need insurance.
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Ensuring Final Needs Are Covered with Life Insurance
The passing of a family member or loved one is never easy, but life insurance aims to financially cushion the blow for the beneficiary or beneficiaries of a policyholder. Often, consumers secure life insurance to protect loved ones from un-timely expenses caused by the passing of the policyholder such as funeral expenses, medical expenses, and unpaid debt.
Life insurance is also purchased to replace a person’s income or provide the beneficiary with financial security. The type and amount of coverage someone needs will differ from person to person. If covering only end-of-life expenses, such as funeral costs, a final expense policy may be the best option.
How Does Final Expense Life Insurance Work?
Final expense life insurance is a small whole life policy designed to cover end-of-life expenses. Often, consumers will consider this type of policy if they are older or have no existing life insurance, and they need to purchase minimum coverage.
Although these policies are designed to cover final expenses, the payout can be used for anything that the beneficiary wishes. Therefore, it is important that the beneficiary is aware of the policy and what the insured’s wishes are for the payout.
How Much Does Final Expense Insurance Cost?
Just like any type of life insurance policy, the rate for a final expense policy varies depending on factors such as the insured’s age, health status, tobacco use, and occupation. The premiums will also be determined by how much coverage the insured needs.
For example, a $20,000 policy for a 50-year-old male with no tobacco use may be about $50 per month. However, a $20,000 policy for a 50-year-old male that uses tobacco may be around $75 a month. Although the price of the policy can vary, final expense insurance can be an affordable option.
Final Expense Life Insurance vs. Term Life Insurance
| Final Expense Life Insurance | Term Life Insurance | |
|---|---|---|
| Purpose | Funeral and burial expenses, unpaid medical bills and legal fees | Final Expenses, income replacement, family security |
| Term Length | No term; lasts entire life of insured | Typically 10-30 years |
| Requirements | Often less health requirements than other types of policies; usually no exam needed | Can have more strict health requirements; health exam may be needed |
| Costs | $50-75 per month for 20k in coverage on a 50-year-old male | $20-40 per month for 25k in coverage for 20 years for a 50-year-old male |
| Death Benefits | Payout to beneficiary tax-free | Payout to beneficiary tax-free |
| Living Benefits | Accelerated benefits, cash value, and possible dividends | Accelerated benefits usually available |
Key Differences
When a policyholder passes away, the payout passes to the beneficiary tax-free, regardless of the type of insurance. The main difference between final expense and term life insurance comes into play while the policyholder is still living.
A final expense life insurance policy will be in effect for the insured’s entire life; a term policy is typically only for a set number of years, often between 10-30 years. Since final expense insurance is a type of whole life insurance, it will build cash value over time and possibly pay dividends. Term life insurance does not have a cash value component. When it comes to price, the price on a final expense policy will never change. However, term insurance has a set number of years that the price is locked in. After that, the price may increase, or the policy could end altogether.
Cost Comparison
When taking cost into account, term coverage may be the more affordable of the two options in the short term. However, that price may go up over time and may become less affordable in the long run. For example, if someone purchases a final expense policy at $50 per month, that price is good for the remainder of the insured’s life. However, the customer may purchase a 10-year term policy of similar coverage for $35 a month, but the price may drastically increase after the initial 10-year term.
Benefits Comparison
Although the policies are very different, there are many similarities. For example, no matter which type of policy, the death benefit passes to the beneficiary tax-free. Also, both policies may offer an additional feature known as living or accelerated benefits. This is a feature that allows the insured to access a percentage of their death benefit while still living.
Often, life insurance companies will allow the insured to access some of their death benefit if they are diagnosed with a critical or terminal illness. These funds can then be used to pay for medical bills, lost wages, or other daily living expenses. The living benefit or accelerated benefit feature may be automatically included in the policy, or it may need to be added to the policy as a rider. The specifics of how the feature works will vary slightly from company to company.
Ideal Policyholder
Final expense policies are targeted toward older consumers with little to no life insurance, or someone looking for a policy specifically to cover their funeral expenses. With some insurance companies, you must be over the age of 50 to purchase this type of policy.
For that reason, the ideal policyholder is one that is older than 50 and needs to purchase a smaller policy for final expenses they may be anticipating. While being healthy is a bonus and may lead to a better premium, final expense policies usually have less strenuous health requirements. Some final expense policies may even be guaranteed to issue without a medical exam.
Final Expense Life Insurance vs. Universal Life Insurance
| Final Expense Life Insurance | Universal Life Insurance | |
|---|---|---|
| Purpose | Funeral and burial expenses, unpaid medical bills, and legal fees | Final expenses, income replacement, family security, cash values while living |
| Term Length | No term; lasts entire life of insured | No term; may last entire life of insured |
| Requirements | Often fewer health requirements than other types of policies; usually no exam needed | Can have more strict health requirements; health exam may be needed |
| Costs | $50-75 per month for 20k in coverage for a 50-year-old male | $50 per month for 25k in coverage for a 50-year-old male |
| Death Benefits | Payout to beneficiary tax-free | Payout to beneficiary tax-free |
| Living Benefits | Accelerated benefits, cash value and possible dividends | Accelerated benefits and possible cash value |
Key Differences
Like a final expense life insurance policy, a universal life insurance policy will pay the death benefit to the beneficiary tax-free upon the passing of the policyholder. The key differences come into play while the insured is still living.
Since final expense insurance is a type of whole life insurance, there is a guaranteed cash value component. The policyholder may also gain dividends – an additional interest paid to the policyholder. However, a universal life insurance policy may offer cash value, but it is often not guaranteed.
Furthermore, there are several types of universal life policies that one can consider, such as indexed, variable, or guaranteed. Depending on what type of policy the insured chooses, the cash value guarantees may differ.
Cost Comparison
When looking at cost for a similar policy, universal life insurance may come up slightly less, though the costs are comparable. However, unlike a final expense policy, the price of the universal life insurance policy may increase over time to ensure that the policy stays in force.
For example, if the insured is paying the minimum premium required, the universal life policy may run the risk of becoming underfunded, and the premium may need adjusting. The premium for a universal life may be flexible while the premium on a final expense policy will remain the same throughout the duration of the policy.
Benefits Comparison
When it comes to benefits, the universal life policy and the final expense policy offer many of the same benefits. For example, they both offer a tax-free payout to the beneficiary upon the passing of the insured. Both types of policies often offer living or accelerated benefits.
Just as with the term policy and the final expense policy, universal life policies can allow the insured to access a portion of their death benefit if they are diagnosed with a critical or terminal illness. Additionally, if there is a cash value available, both policies will allow the insured to access those funds while they are living. This is an additional living benefit that term policies do not offer.
Ideal Policyholder
Unlike with a final expense policy, there are usually no minimum age requirements to purchase a universal life policy. However, because final expense policies are only offered at lower coverage amounts, consumers who need a larger death benefit may look into a universal life policy.
For example, a 55-year-old who is retired and has little to no debt may look at a final expense policy. A 25-year-old who has a spouse and children may need to cover not only their final expenses but also replace their income or pay off their mortgage should they pass away. The larger the death benefit that someone purchases, the more requirements the life insurance company may have.
Oftentimes, life insurance companies may require their insureds to meet minimum health criteria and undergo a medical exam. For this reason, those that have health issues may not be able to purchase a universal life policy, however, they may still be eligible for a final expense policy.
Final Expense Life Insurance vs. Variable Life Insurance
| Final Expense Life Insurance | Variable Life Insurance | |
|---|---|---|
| Purpose | Funeral and burial expenses, unpaid medical bills, and legal fees | Final expenses, income replacement, family security, cash value, and investment opportunity |
| Term Length | No term; last entire life of insured | No term; last entire life of insured |
| Requirements | Often fewer health requirements than other types of policies; usually no exam needed | Can have more strict health requirements; health exam may be needed |
| Costs | $50-75 per month for 20k in coverage for a 50-year-old male | Varies greatly depending on policy |
| Death Benefits | Payout to beneficiary is tax-free | Payout to beneficiary is tax-free |
| Living Benefits | Accelerated benefits, cash value, and possible dividends | Accelerated benefits, cash value, and possible return on investments |
Key Differences
While both a final expense policy and a variable life policy are types of permanent policies and offer a death benefit, they differ greatly. A variable life insurance policy is different than any other type of life insurance policy because it introduces an investment aspect. Like a final expense life policy, a variable life policy gains interest.
With a final expense life policy, the interest goes into a portion of the policy known as the cash value; the cash value can increase but never decrease. With a variable life policy, the policy also gains interest, but that goes into a cash account. That cash account can then be invested into mutual funds.
While the cash account of variable life insurance can grow more rapidly, it can also decrease. If the mutual funds attached to the life policy lose money, the life policy will also lose money.
Cost Comparison
When looking at cost, final expense insurance will be typically less than that of a variable life. This is because variable life policies have higher fees than most insurance policies. Because of this, if someone is looking for a policy to cover their final expenses, a variable life policy will be more expensive.
Benefits Comparison
While both policies provide a tax-free death benefit, there are other similiters between the two. Just like the final expense policy, a policyholder can take a cash withdrawal from their cash account on a variable life policy. They may also both offer the accelerated or living benefits feature.
Ideal Policyholder
When it comes to purchasing a variable life insurance policy, the insured should remember that this type of policy is different than basic whole life, final expense, term, or universal life insurance policies. While a variable life policy does offer a death benefit, policyholders considering a variable life policy over other policies often do so for the cash account aspect.
These types of policies also require more time on the part of the policyholder. For that reason, the ideal policyholder would be familiar with how these types of policies work. They should also be someone who has other life insurance in force. Because the cash value of the variable life can be lost, this is not an ideal policy for a young family or older consumer with no other type of life insurance.
Who Should Consider Final Expense Life Insurance?
When it comes to who should consider a final expense policy, it should be ideally someone that has no other life insurance or wants to specifically cover their burial expenses. Since final expense life insurance often has fewer health requirements than other types of policies, it could be ideal for those who have medical conditions and do not qualify for other types of life insurance.
A final expense policy is not meant to cover all expenses that a policyholder may leave behind. For this reason, some consumers may have to look at other types of policies that offer higher benefit coverages.
How to Purchase Final Expense Life Insurance
If someone wants to purchase a final expense life insurance policy, the process is simple:
- Contact their insurance agent or gather research from various insurance carriers to determine whether final expense life insurance is the right fit
- Review and compare final expense policies to ensure they receive the best terms for the cost of the policy
- Once the chosen policy has been approved, the policyholder will begin paying the premium and the policy will take effect.