Final Expense Insurance: An Alternative For Older Adults
What is a final expense insurance policy?
Final expense insurance, also known as funeral insurance, burial insurance, simplified issue whole life insurance, or modified whole life insurance, is a type of whole life insurance policy. This insurance product is designed with a relatively small death benefit and is characterized by its accessibility for approval. Typically, final expense insurance policies have face values (and death benefits) ranging from $2,000 to $35,000. These policies are structured to help cover the costs associated with funeral expenses and other end-of-life financial obligations.
Final expense insurance and life insurance are essentially the same, with the only distinction being that insurers offer smaller final expense policies to enhance affordability. The primary purpo se of final expense insurance is to cover end-of-life expenses, including funeral or memorial service costs, embalming, a casket, or cremation expenses. However, one notable aspect of final expense insurance is that beneficiaries have flexibility in using the death benefit. While the initial intention is to address immediate funeral and related expenses, beneficiaries are not restricted in how they allocate the funds.
Final expense insurance is marketed specifically to individuals in their later years who are contemplating funeral costs. The messaging often emphasizes the necessity of obtaining this insurance as a means to responsibly provide for their family’s financial well-being.
For individuals who already possess existing life insurance policies that can cover final expenses, the necessity of acquiring a new final expense insurance policy may be questioned. Similarly, if someone has already prepaid their funeral expenses, obtaining final expense insurance might be considered redundant.
Advantages of Final Expense Insurance
- Final expense insurance policies are generally more affordable compared to other types of life insurance
- Qualifying for final expense insurance is relatively straightforward
- Premiums for final expense insurance remain constant over time
- The death benefit remains stable and cannot be decreased, except under specific circumstances
- Heirs can utilize the death benefit for any purpose
- The death benefit is guaranteed as long as premiums are consistently paid
- The death benefit is typically not subject to taxation
Disadvantages of Final Expense Insurance
- The face amounts are generally lower compared to other types of insurance
- A policy can sometimes be more expensive due to the simplified health qualification process
- Providers may present information that is misleading or incomplete
- Insurers might attempt to obscure or downplay details such as longer waiting periods
- In the event of a long lifespan, total premiums paid may surpass the death benefit
What does the insurance policy entail?
Unlike term policies, which have a specified duration, a whole-life policy does not expire based on reaching a certain age. A whole-life policy also builds cash value over time, which can be utilized as a borrowable amount during your lifetime. However, any outstanding loans at the time of your death will diminish the amount that your beneficiaries ultimately receive.
When applying for final expense insurance, you are not required to undergo a medical exam or grant the insurance company access to your medical records. Nevertheless, you will need to respond to specific health questions. Due to these health-related inquiries, not everyone may be eligible for a policy with immediate coverage initiation.
Certain insurance companies offer final expense policies for individuals ranging from birth to age 85. However, the ability to apply for a policy may depend on factors such as a minimum age requirement (e.g., 45) and a maximum age limit (e.g., 85). Additionally, the maximum death benefit that can be selected might be smaller for older individuals, varying based on the policy and the insurer.
The maximum death benefit for final expense policies can vary based on age. For instance, policies may go up to $50,000 for individuals younger than 55 but reduce to $25,000 once you turn 76. However, certain insurers provide a consistent maximum death benefit for all applicants, irrespective of their age.
How does the policy work for the older population?
Consider a scenario where you are retired, without life insurance coverage from your employer or an individual life insurance policy. Additionally, there is no substantial life savings to alleviate the financial responsibilities for your spouse and/or children upon your passing.
Contemplating a new life insurance policy, you reach out to a life insurance agent to initiate the application process. As part of this process, you respond to some fundamental health-related inquiries. While your primary focus is on the death benefit, you find that the premiums are prohibitively expensive due to factors such as your age and health.
Regrettably, the insurance company does not offer policies with a sufficiently small death benefit to align with your budget constraints. Faced with this limitation, you may contemplate giving up, assuming that life insurance is unaffordable for your current financial situation.
Final expense life insurance is crafted to address this specific challenge. These policies are structured by insurance companies to mitigate the impact of certain significant medical issues. Consequently, even seniors with health challenges can typically secure a policy through this specialized form of insurance.
The reduced death benefit of final expense insurance contributes to more manageable premiums. Additionally, this type of policy is permanent, ensuring that, regardless of when you pass away, your heirs will receive the designated death benefit, provided you have consistently paid the premiums.
While final expense insurance may not cover all expenses, it can provide valuable assistance to your loved ones in paying some bills directly. This can be particularly beneficial for covering costs that might otherwise pose a financial challenge for your beneficiaries.
Costs of Final Expense Insurance
Similar to other forms of life insurance, the premiums for final expense insurance are contingent on factors such as your age and health. In some jurisdictions where permitted by state law, gender may also be a consideration in determining the premium amount. Once a whole life insurance policy is in place, the premiums remain fixed, ensuring they do not increase over time. Additionally, the death benefit associated with the policy does not decrease.
Premium rates for a specified insurance amount rise with age and declining health, resulting in higher costs for older and less healthy individuals. Men typically incur higher rates than women due to their shorter average life expectancy. Moreover, certain insurers may offer lower rates to individuals who do not use tobacco.
Many websites providing final expense insurance have calculators that offer a cost estimate. As an example, a 65-year-old woman looking for a $10,000 face amount with no waiting period might pay around $41 per month. Opting for a guaranteed acceptance policy could result in a monthly payment of $51. Similarly, a 65-year-old man seeking a $10,000 face amount and no waiting period might pay about $54 per month, and $66 for a guaranteed acceptance policy.
Other Types of Final Expense Insurance
There isn’t a one-size-fits-all final expense insurance solution from a single insurer. To find the most favorable rates, it’s crucial to obtain quotes from multiple insurance companies that assess your health differently. Companies that view your health more favorably are likely to offer better rates. Opting for a policy with an approval process that solely involves health questions can be another strategy to keep rates more affordable.
Individuals with health conditions that are moderately serious may be eligible for a graded benefit policy rather than a guaranteed issue policy. Semi-serious health conditions that might qualify include being in remission from cancer within the last 24 months, having congestive heart failure, or undergoing treatment for alcohol or drug abuse in the last 24 months.
For individuals dealing with more serious health conditions, such as a terminal illness, ongoing cancer treatment, or having undergone heart surgery in the last 12 months, eligibility may be limited to a guaranteed issue policy. With this policy, there is typically a waiting period of at least two years before any coverage becomes effective.
Graded Benefit Final Expense Insurance
A graded benefit policy with a partial waiting period is a type of policy that may provide a payout ranging from 30% to 40% of the death benefit if the insured passes away within the initial year of the policy being in force. In the case of a graded benefit policy with a partial waiting period, it could potentially pay out 70% to 80% of the death benefit if the insured passes away in the second year that the policy is in force. Following the completion of these initial two years, the policy would then pay out the full 100% of the death benefit if the insured were to pass away.
Guaranteed Issue Final Expense Insurance
Individuals facing serious health issues may be eligible for a policy that doesn’t necessitate medical questions, an exam, or the submission of medical records. However, it’s important to note that such guaranteed issue policies typically come with a waiting period of two to three years before benefits are paid out.
In the unfortunate event that the insured passes away during the waiting period, the beneficiaries will not receive the full death benefit as outlined in the policy. Instead, they will receive a return of the premiums paid by the policyholder, along with interest, often at an annual rate of 10%.
Even if you provide a less-than-ideal answer to a health question, it doesn’t automatically result in rejection from every insurance company. Some companies may still extend offers, which could include immediate coverage with higher premiums, a graded benefit policy, or a guaranteed issue policy, providing options for individuals with varying health situations.
Who Needs Final Expense Insurance?
If you have significant savings, investments, and an existing life insurance policy, final expense insurance may not be necessary. However, considering the escalating costs of funeral and related expenses, you might still want to contemplate final expense insurance. This ensures that your family has the necessary resources to cover bills associated with your passing, providing an additional layer of financial security.
Final expense insurance becomes a viable option if purchasing regular insurance is financially challenging, yet you still wish to mitigate the potential financial burden that your passing may impose on others. It’s important to note that even if your estate has sufficient funds, the final settlement process can sometimes extend over months. The availability of funds may not align with immediate financial needs, potentially leaving your loved ones in a challenging financial situation.
If you have the financial means to purchase a larger policy to meet the company’s minimum death benefit requirements, opting for regular life insurance might be more advantageous. Many insurance carriers mandate a minimum face value ranging from $50,000 to $100,000 for traditional whole-life or term insurance. While higher face amounts result in lower costs per $1,000 of coverage compared to final expense policies, the associated premiums might be beyond the budget of some individuals.
Some clients, despite easily qualifying for a traditional whole or term policy, opt for final expense insurance due to their preference for a lower coverage amount, such as $20,000 or $30,000. Additionally, claims on these policies are frequently processed more expeditiously than claims on larger policies, contributing to the appeal of final expense insurance for certain individuals.
Conclusion
Final expense insurance offers a relatively modest yet significant payout to loved ones following your passing. This payout can be utilized to cover various traditional services, including funeral or memorial expenses, providing a financial resource to ease the burden on your family during a challenging time.
Final expense insurance is accessible and budget-friendly, with coverage amounts spanning from $2,000 to $35,000. While not an extensive sum, the benefit can be a crucial financial support for family members who may lack the means to cover the expenses related to your passing. Additionally, if your beneficiaries already have the necessary funds for obligations, the benefit can be applied in any way they deem fit. This flexibility adds to the utility of final expense insurance in providing support during challenging times.
