Final expense insurance

What final expense insurance is

Strip away the marketing and it is an ordinary whole life insurance policy in a small size. Whole life has three features that matter here. The premium never rises, the death benefit never shrinks, and the policy never expires as long as the premium is paid. Those three things are exactly what a funeral needs, because a funeral is a bill that arrives at an unknown date and grows more expensive every year you wait.

The differences from a large whole life policy are practical rather than structural. Face amounts are small, so the carrier accepts a much lighter underwriting process. There is no paramedical exam, no blood draw and no urine sample. Instead you answer a page of health questions, the carrier checks a prescription history database and the Medical Information Bureau, and a decision usually comes back the same day. Many applications are approved during the phone call itself.

Because the policy is whole life rather than term, it also builds a modest cash value over time. That cash value is not the reason to buy it. Anyone selling final expense insurance as a savings vehicle is selling it wrong. The reason to buy it is that the death benefit pays quickly, tax free to the beneficiary in almost every case, at a moment when the family needs money faster than any other asset can produce it.

Three names, one product

Final expense insurance, burial insurance and funeral insurance are for the most part three names for the same policy. Carriers and agents use final expense because it is the broader and more accurate description. Consumers search for burial insurance because that is the outcome they have in mind. Funeral insurance is largely an advertising term. None of the three is a distinct legal category, and a policy sold under any of them is usually a simplified issue whole life contract.

Preneed insurance is the one name in this family that genuinely means something different, and the difference matters. It is bought through a funeral home rather than an agent, and the benefit is assigned to that funeral home to pay for a specific list of goods and services. Read the table before you assume all four are interchangeable.

The practical distinction is control. With final expense insurance your family holds the money and decides how to spend it. With a preneed contract the funeral home holds the arrangement, which is convenient until someone moves, the home changes hands, or the family wants a different service.

What the money is actually used for

The death benefit is paid in cash to a person, not to a funeral home, so there is no restriction on what it covers. In practice families use it for a short and fairly predictable list.

• The funeral home bill, which the NFDA puts at a median of $8,300 for a burial with a viewing and $6,280 for a cremation with a service.
• The cemetery bill, which is a separate invoice for the plot, opening and closing the grave, a vault and a headstone.
• Travel and accommodation for family who have to get there quickly at whatever the airfare happens to be that week.
• Medical bills, deductibles and co-payments left behind by a final illness.
• Credit cards, a car loan or a few months of rent or mortgage on a home that has to be cleared and sold.
• Probate and legal costs, and the cost of keeping a household running while an estate settles.

Two of those are the ones people forget. Cemetery charges are not in the widely quoted funeral averages at all, and unpaid consumer debt does not disappear at death. Our full breakdown of funeral costs itemises both.

How much coverage to buy

Buy to the bill, not to a round number. A traditional burial with the cemetery included commonly lands near $15,395 today. A cremation with a service is far less, and a direct cremation less again at about $2,202. The right face amount is the service you actually want, plus a margin for the costs above, in the state where you will be buried.

Funeral prices have risen faster than general inflation for two decades, so a policy sized exactly to today’s bill is slightly small by the time it pays. The fix is not to overbuy wildly. It is to add a sensible margin and then leave the policy alone, since the premium you lock in today never changes while the bill keeps climbing. Run your own state through the calculator before you pick a number.

What it costs by age

Price is driven by age, sex, tobacco use, health answers and state. The table below shows an illustrative monthly range for a $10,000 level benefit policy for a non-tobacco applicant. It is a range on purpose, because the same person is routinely quoted figures far apart by two carriers on the same day and both quotes are correct.

Illustrative ranges only, shown to give a sense of scale. They are not quotes, they are not carrier specific, and no rate is guaranteed until an application is approved. Your own figure depends on age, sex, tobacco use, health answers and the state you live in.

Two things fall out of that table. The first is that waiting is expensive, because the rate is set by your age on the day the policy is issued and never resets. The second is that a long enough life will pay more in premiums than the policy returns, which is true of every insurance product and is the wrong way to judge one. Insurance is bought for the case where the money is needed sooner than expected.

Level, graded and guaranteed issue

There are three underwriting outcomes, and knowing which one you were sold is the single most useful thing you can learn about your own policy.

Most people who are told they need a waiting period do not. Controlled blood pressure, controlled diabetes, high cholesterol, arthritis and an old cancer that has been clear for years are routinely written at level rates. Who qualifies for day one coverage goes through the health questions one at a time, and guaranteed acceptance explains the narrow group who genuinely need the third row.

Who it suits, and who should buy something else

Final expense insurance is a good fit for someone between roughly 50 and 85 who wants a modest, permanent, affordable amount of coverage that will still be in force at 90. It suits people whose health rules out fully underwritten insurance, people who do not want a medical exam, and people whose only real insurance need is the funeral itself.

It is the wrong product if you need a large amount of coverage. If your goal is to replace an income, clear a mortgage or protect young children, a fully underwritten term or whole life policy will give you several times the death benefit per dollar of premium. Term life covers that case properly, and whole life explains where permanent coverage earns its higher price. A healthy 55 year old who buys a $10,000 final expense policy when they need $500,000 of term has solved the smaller problem and left the larger one open.

It is also the wrong product if you already hold enough permanent coverage that will still be in force at the end. Whether your existing life insurance covers the funeral is worth checking first, because the honest answer for many people is that they are already covered and the timing is the only problem.

How it differs from a prepaid funeral plan

A prepaid or preneed plan is a contract with one funeral home. You are buying goods and services rather than money. That has one real advantage, which is that some plans guarantee the price of the service against future inflation. It also has drawbacks that families discover late. The plan is tied to that funeral home, and it moves poorly if you relocate or the business is sold. State protection for the money varies, since preneed sales are regulated by state funeral boards and insurance departments rather than by one federal standard. And the plan covers what is listed in it, so anything the family wants that is not on the list is paid for separately.

Final expense insurance keeps the money and the decisions in the family. If they want a cheaper service they keep the difference. If they want a different funeral home they use one. The trade off is that the death benefit is a fixed amount rather than a guaranteed service, which is why sizing it with a margin matters.

Buying it without overpaying

Rates are filed with state insurance departments, so no agent can discount a policy. What an agent can do is put you with the carrier whose underwriting treats your particular health history most kindly, which is where the real money is. Carriers disagree substantially about the same medical condition. One will decline an applicant, another writes them at level rates, and neither is being unreasonable.

• Answer the health questions accurately. A misstatement discovered during the contestability period, usually the first two years, can void the claim.
• Compare more than one carrier before you sign. Being quoted only one company is a sign you are talking to a captive agent rather than a broker.
• Buy a premium you can pay for the rest of your life. A lapsed policy returns very little, and the coverage is gone when it is needed.
• Check whether the policy is level, graded or guaranteed issue and get that answer in plain language before you sign.
• Name a beneficiary and a contingent beneficiary, and tell them the policy exists. Unclaimed policies are a genuine problem.