What Is Final Expense Insurance?
Final expense insurance is a whole life insurance policy that has a small death benefit and is easier to get approved for. Final expense insurance is also called “funeral insurance,” “burial insurance,” “simplified issue whole life insurance,” or “modified whole life insurance.” All are marketing terms that the insurance industry uses to sell small whole life policies with a face value (death benefit) of $2,000 to $50,0001 2
There is no difference between final expense insurance and normal life insurance other than the fact that insurers sell smaller policies to make it more affordable, says Richard P. Sabo, a financial planner and insurance fraud expert in Gibsonia, Pa.3 Final expense insurance has a death benefit designed to cover expenses such as a funeral or memorial service, embalming and a casket, or cremation. However, the beneficiaries can use the death benefit for any purpose, from paying property taxes to taking a vacation.4
“They market the final expense insurance to people who are older and starting to think about their funeral costs, and they make it look like they need to do it in order to take care of their family,” says Sabo. “Some people already own existing life insurance policies that can go toward paying final expenses, so do they really need a new policy?” Another situation where final expense insurance may be redundant is if someone has already prepaid their funeral expenses, he adds.3
Final expense insurance is just a marketing term for a small whole life insurance policy that is easy to qualify for.
The beneficiaries of a final expense life insurance policy can use the policy’s payout for any purpose whatsoever.
The death benefit is usually somewhere between $2,000 and $50,000.
How Does Final Expense Insurance Work?
Let’s say you’re retired, no longer have life insurance through your employer, and don’t have an individual life insurance policy. You also don’t have a comfortable nest egg and are worried about the financial burden you’ll leave on your spouse and/or kids when you die.
You contact a life insurance agent and start the application process, which includes answering a few basic questions about your health. The death benefit is great, but the premiums are not affordable because of your age and health. Unfortunately, they don’t issue policies with a death benefit that’s small enough to make the insurance premiums fit your budget. At this point you might give up and assume you can’t afford life insurance.
Final expense life insurance is designed to solve this problem. “The insurance companies built these policies to absorb the risk of some serious medical issues,” says Anthony Martin, CEO of Choice Mutual, a final expense life insurance brokerage company. “This means that most seniors, despite poor health, can still secure a policy.”2
Smaller Death Benefits
The smaller death benefit of final expense insurance makes the premiums more affordable, as Sabo notes above. And the policy is permanent. No matter when you die, your heirs will get the death benefit you want them to have, as long as you’ve paid your premiums.
It may not cover everything, such as paying off a large mortgage, but final expense insurance will at least help your loved ones pay the bills: bills directly related to your death, bills they’ll have a harder time paying without your income, or anything else.
However, if your family has other ways to pay your final expenses, you should think twice before buying a policy. The table below highlights the pros and cons of final expense insurance. It also shows how the moniker is just a marketing term.
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.
Some insurers put confusing or misleading information in their marketing materials (this is also true for other types of life insurance).
Some insurers provide incomplete information about these policies in their marketing materials (also true for other types of life insurance).
Because the policies have relatively low death benefits, you could lose money if you live a long time and pay more in premiums than your beneficiaries will receive as a death benefit. (You also lose money when you pay term premiums and don’t die while the policy is in force.)
Some people let their policies lapse, which means their heirs won’t receive a death benefit (also true for other types of life insurance).
Some final expense insurers use marketing scare tactics based on high average funeral costs and play on seniors’ fears of burdening their loved ones.
Some insurers steer consumers without major health problems toward more-restrictive and expensive policies even though they can qualify for better coverage.
Understanding Final Expense Insurance
As with any type of life insurance, the premiums for final expense insurance depend on your age and health; where allowed by state law, they may also depend on your gender. The older and less healthy you are, the higher your rates will be for a given amount of insurance. Men tend to pay higher rates than women because of their shorter average life expectancy. And, depending on the insurer, you may qualify for a lower rate if you do not use tobacco.5 6
Some insurance companies issue final expense policies to people from birth to age 85. However, depending on the policy and the insurer, there may be a minimum age (such as 45) and maximum age (such as 85) at which you can apply. The largest death benefit you can select may be smaller the older you are. Policies might go up to $50,000 as long as you’re younger than 55 but only go up to $25,000 once you turn 76. Some insurers offer the same maximum death benefit to all applicants regardless of age.
As mentioned earlier, final expense insurance is a type of whole life insurance. Whole life policies are pretty easy to understand as far as permanent life insurance goes. Once you have your policy, the premiums cannot increase, and the death benefit cannot decrease. Unlike a term policy, a whole life policy does not expire when you reach a certain age. A whole life policy also accumulates cash value that you can borrow against, though any loans that are unpaid when you die will reduce how much money your beneficiaries receive.
When you apply for final expense insurance, you will not have to deal with a medical exam or let the insurance company access your medical records. However, you will have to answer some health questions. Because of the health questions, not everyone will qualify for a policy with coverage that begins on day one.
Guaranteed Issue: A Special Type of Final Expense Insurance
Applicants with serious health issues will only qualify for a policy that does not require medical questions, an exam, or medical records. These guaranteed issue policies always have a two- to three-year waiting period before benefits will be paid.2
If the insured dies during the waiting period, the beneficiaries will not receive the policy’s death benefit. They will, however, receive a return of the premiums the policyholder paid—plus interest, usually at an annual rate of 10%.2 5 For more on guaranteed issue policies, including how life insurance companies can afford to offer them, read our piece on guaranteed issue life insurance.
As of April 1, 2020, New York Life sells a term life insurance policy that provides $10,000 to $50,000 of coverage, which is marketed to seniors in conjunction with AARP. While the coverage amount is similar to that of a final expense policy, this term policy expires at age 80 and has increasing premiums.7 A policy that can expire before you die might not cover your final expenses or any other financial needs your beneficiaries might have. Don’t confuse term insurance for seniors with the final expense policies described in this article.
Real-Life Example of Final Expense Insurance
Using Choice Mutual’s online quote tool, we found that for a 68-year-old man in California, a $25,000 final expense insurance policy with health questions and immediate coverage might cost $156 to $180 per month, while one without health questions (a guaranteed issue policy with a waiting period) might cost $234 to $345 per month.8 Let’s say that man has congestive heart failure and only qualifies for a guaranteed issue policy with a two-year waiting period. If he buys the most expensive policy with the $345 monthly premium, after two years he will have paid $8,280 in premiums. His beneficiaries will come out ahead if he dies between the first day of year three (when the waiting period ends) and the end of year six, when the premiums paid will be about equal to the death benefit.
People who are healthy should not buy from a company that only sells guaranteed issue policies, because they will pay an unnecessarily higher price and coverage will not start on day one.3 2 They may not even want to buy a final expense policy, according to Sabo. The caveat is that you have to be healthy enough to qualify. Sabo says that a 68-year-old nonsmoking male in California could get a $25,000 guaranteed universal life policy for about $88 per month. This policy would expire at age 100, so it does provide less coverage than a whole life policy. You’ll want to take your own health and budget into account when deciding whether a trade-off like this is worth it.
Guaranteed universal life, like whole life, does not expire as long as you buy a policy that covers the rest of your life. You can buy a policy that will cover you to age 121 for maximum protection, or to age 100, or to a younger age if you’re trying to save money and don’t need coverage after, say, age 90. It costs less than final expense insurance because it doesn’t have a cash value component.9
When ‘Regular’ Life Insurance Is Better
“If you can afford to buy a larger policy to meet company minimum death benefits, then you are better off buying regular life insurance,” says Sabo.3 Martin agrees. He says that most insurance carriers require a minimum face value of $50,000 to $100,000 on traditional whole life or term insurance. The higher face amounts will lead to higher premiums than some people can afford, even though the cost per $1,000 of coverage is less than that of a final expense policy. He said that many of his clients who could easily qualify for a traditional whole or term policy choose final expense because they only want $20,000 or $30,000 of coverage and claims on these policies are often paid faster than claims on larger policies.2
Sabo explains that many life insurance companies have raised their minimum death benefits to $50,000 because it is not worth the time to process the application and do all of the underwriting for smaller policies. “Some companies specialize in final expense insurance and have created a system and underwriting to sell smaller policies and make smaller profits, but they are doing volume,” he says.3
In-Between Option: Graded Benefit Final Expense Insurance
There’s a third type of final expense insurance, and that’s a graded benefit policy with a partial waiting period. This type of policy might pay 30% to 40% of the death benefit if the insured dies during the first year the policy is in force, and it might pay 70% to 80% if the insured dies during the second year the policy is in force. If the insured dies after those first two years, then the policy would pay out 100% of the death benefit.10
If you have health conditions that are only semi-serious, you might qualify for a graded benefit policy instead of a guaranteed issue policy. Examples include entering remission from cancer in the last 24 months, having congestive heart failure, or being treated for alcohol or drug abuse in the last 24 months. By comparison, a more serious condition, such as a terminal illness, currently being in cancer treatment, or having had heart surgery in the last 12 months, would only allow you to qualify for a guaranteed issue policy where you’ll have to wait at least two years for any coverage.10
No single insurer offers the best final expense insurance across the board, says Martin. It’s important to get offers from multiple insurance companies to find the ones that view your health most favorably. Those companies will likely offer you the best rates. Trying to qualify for a policy that has health questions is another way to keep rates down.2
Even if you have a less-than-ideal answer to a health question, it does not mean every company will reject you. Some may offer you immediate coverage with higher premiums, a graded benefit policy, or a guaranteed issue policy.10
Sometimes choosing the least expensive policy for which you qualify makes the most sense. However, if you are working with an experienced life insurance broker who sells policies from lots of insurance companies, instead of an agent who only sells one company’s insurance, your broker may be able to advise you on which companies are easiest to work with. Some provide better service to applicants and policyholders than others, according to Martin. That said, some people will need to choose the least expensive option even if the customer service might not be very good.