Life insurance can protect you and your loved ones in a variety of ways. If you're concerned about end-of-life costs like funeral expenses and medical bills, a final expense insurance policy may offer peace of mind. This type of policy provides financial support after someone dies, and it can be surprisingly easy to get one, even when health issues make it hard to buy standard insurance coverage.
What Is Final Expense Coverage?
Final expense insurance, also known as funeral insurance, is life insurance that's intended to help with end-of-life costs. The death benefit is typically small, which makes these policies inexpensive and relatively easy to qualify for. Still, they may provide enough money to pay for essential expenses like:
- A memorial service (including the venue, flowers and other costs).
- Burial or cremation costs.
- Travel for loved ones.
- Medical bills.
These costs can add up. If you've been budgeting and working on your financial plan, you may know that paying for a funeral, viewing and burial can cost more than $9,000. With final expense insurance, beneficiaries receive a lump-sum payment, and they can use the funds for anything they want.
There are two major categories of final expense coverage:
- Simplified issue: With a simplified issue policy, you typically have to answer some questions about your health. You must have relatively good health to qualify, but there is generally no medical exam required.
- Guaranteed issue: For a guaranteed issue policy, you do not need to answer questions or qualify based on your health. However, premiums tend to be higher, and you may face a two-year waiting period before you're eligible for benefits.
Final expense coverage is a form of whole life insurance, so as long as you pay the costs of insurance, the policy can remain in place for as long as you live. Whole life policies include a cash value that can help smooth out those costs over an extended period, and you typically pay a flat monthly or annual premium. You might be able to borrow against the cash value, but it's critical to monitor your policy over time to prevent the cash value from running out. If that happens, you may lose your coverage, and you could owe taxes.
Final Expense Coverage vs. Other Policies
Most life insurance policies offer similar benefits, such as a lump-sum death payment that is often tax-free for beneficiaries. However, insurance that you buy for final expenses might differ from other policies you may be familiar with.
Unlike large policies designed to replace a breadwinner's income for several decades, final expense insurance tends to have a small death benefit, which may range from $10,000 to $35,000, for example. Likewise, the cash value in these policies is typically modest and may not provide substantial funds for loans and withdrawals.
Permanent vs. Term Policies
Final expense coverage only works if the policy is in force at death, and there's no way to know when that will be. Accordingly, these policies are usually "permanent" and exist for as long as you continue to pay the costs of insurance. In contrast, young families often use term insurance policies for temporary protection.
You generally own your own policy, which is not tied to your workplace. As a result, you can keep your coverage after changing jobs or retiring.
Standard insurance policies often require a detailed review of your health history and a medical exam that includes blood and urine samples. Final expense policies do not scrutinize your health to the same degree.
Who Might Be a Good Fit
Final expense coverage may be appropriate for anybody concerned about paying for costs after death. While every insurance company is different, some insurers only offer coverage to those over age 50.
Final expense insurance might be a good fit if you're looking to cover both yourself and your loved ones. You can get insurance for yourself if you'd like to help loved ones financially after your death, and you might also be able to buy coverage for others, such as your spouse or parents — especially if they are not financially secure. Doing so can provide funds to ensure that they get a meaningful memorial after death.
If you can't buy affordable insurance due to health issues, final expense insurance may be a working solution. With guaranteed issue final expense insurance, you can bypass the detailed health review, and you might even be able to buy coverage without answering any health questions.
So-called funeral insurance might make the most sense for people who are concerned about expenses related to death. This likely won't be suitable for a young family that wants to fund a college education, pay off a mortgage or replace lost wages. However, if you want to ensure that loved ones have money for funeral costs and related expenses, it can be an excellent solution.
Pros and Cons
There are always pros and cons with financial decisions of this kind. Be sure to evaluate what's most important for your beneficiaries, and find a solution that best matches what they will need after the death of a loved one.
- Funeral insurance is relatively easy to qualify for and purchase. You may only need to answer questions about your health, and there's typically no medical exam required.
- Beneficiaries can use the death benefit for anything. Whether they need cash for funeral costs, medical bills or unpaid debts, the funds will be available for spending.
- Premiums are usually low because these policies are relatively small, and you're not required to purchase more than you need.
- The death benefit is usually tax-free for beneficiaries, but check with a CPA to avoid any surprises.
- A small death benefit might not provide all of the funds needed. If beneficiaries need more money, it may make sense to get more coverage with a standard policy.
- Premiums for final expense insurance can be higher than those for policies that require a medical review. If you're in good health, it's wise to compare the prices of several types of insurance.
- Guaranteed issue policies, which do not require you to answer any medical questions, may have a two-year waiting period. If you die before the period ends, beneficiaries would not get the full death benefit, but they may receive a refund of all premiums plus any interest earnings.
Final expense insurance can provide a lump sum of funds to pay for funeral costs, medical bills and other expenses related to death. However, the policies are relatively small, so they make the most sense for adults who only need money for funeral costs and similar expenses. If you're healthy or you need a bigger death benefit, consider traditional life insurance policies as alternatives.
Final expense insurance can be a fitting solution if you have health issues that prevent you from buying life insurance or if life insurance is not affordable.
It can be a burden for loved ones to suddenly have a pile of end-of-life costs on their plate. To help prevent this, speak with an advisor to see if final expense insurance may be right for you and your family.