We recently went through the trauma of losing my dad. We were fortunate that our finances were solid enough to not have to worry about funeral costs. In fact, my sister wanted to spend even more money. She wished we got a bigger reception room at the funeral home, since far more people showed up than we expected. Yes, even despite the concerns and protocols surrounding the pandemic.
Still, I saw firsthand how almost everything about a funeral costs a pretty penny. From clothes to flowers to candles to makeup, everything is marked up a notch when it’s related to a funeral. A relatively simple funeral for my dad quickly cost a few thousand dollars. It could have easily been much higher, too. It’s no wonder that so many families struggle to afford this kind of sudden expense.
Final Expense Insurance, Explained
Luckily, the insurance industry saw this need. They came up with final expense insurance. Also referred to as “burial insurance” or “funeral insurance”, it’s basically a whole life insurance policy with smaller premiums and a smaller payout. The best thing about final expense insurance is that these policies are easy to qualify for. Some even let you skip medical exams generally required for regular life insurance policies. Some don’t even need you to answer any medical questions at all.
There’s also no restriction on how you use the money that the policy pays out. You can use it for funeral costs as intended. Or you can use it to buy a new iPad. (But don’t ignore those funeral costs.) This is just like life insurance. Final expense insurance will be paid out upon the policy holder’s death. You won’t need to submit receipts for funeral costs or anything like that. The insurance company will simply cut you a check.
Limitations of Final Expense Insurance
No, you can’t simply buy final expense insurance on your death bed and expect a payout.
When I heard about the benefits of a final expense insurance, I wondered if there was a loophole. Could you just wait until your parent (or other relative) was relatively close to the end of their life? Could you still buy it after a major medical event like a stroke or heart attack? What about after a terminal illness diagnosis?
For example both my grandfather and father-in-law were in the ICU for months before they died. Couldn’t either of them have simply added a final expense policy when things were looking bleak? After all, they wouldn’t be around to pay the premiums for much longer and then their families would receive the extra payout. Wouldn’t that be like gaming the system, though? If enough people did this, wouldn’t it bankrupt the insurance companies?
Turns out that the insurance companies planned for that kind of loophole. I found out that although most standard policies don’t require a medical exam (and they won’t look at your medical records), they do require you to answer a health questionnaire to determine eligibility. There are special policies that skip the questionnaire step entirely. However, those policies typically have a built-in waiting period. That is, they won’t pay out unless at least two-to-three years have passed. So no, you can’t run out and get funeral insurance in the days after a terminal cancer diagnosis.
Graded Benefit vs. Guaranteed Issue vs. Standard Policy
If you have serious health issues, you might not qualify for a final expense insurance. In that case, you’ll obviously want the policies that doesn’t require a health questionnaire. These policies are called “guaranteed issue.” Aside from the waiting period (where the benefit won’t be paid if the policy holder dies within a certain time frame), premiums are generally much higher. The good news, though, is that the premiums cannot be wasted. If insured person dies within the waiting period, the premiums are simply returned, with interest. While they may not cover the cost of a funeral, at least they aren’t lost forever.
There’s a third, middle ground option for final expense insurance. It’s known as graded benefit insurance. Instead of the all or nothing approach of the other two options, a graded benefit policy is more nuanced. It will pay out a portion of the policy based on how long the insured has been paying premiums. For example, it might pay out one-third of the total amount if the insured party dies within a year. Then the payment increases to two-thirds if the decease dies in the second year. At some point in time down the road, the full benefit is unlocked. (Once the insurance company is sure you will make them a profit, no doubt.) You’ll still need to qualify for a graded benefit policy based on your health. However, the requirements are generally much easier than getting a standard policy.
Which Option Should You Pick?
With final expense insurance being just a type of whole life insurance, there are basically four different types of insurance that acts the same way. After all, the gist of whole life is that once you qualify for a policy, you agree to pay a predetermined monthly premium forever. When you die, the policy will pay out a set amount to your beneficiaries.
The way to figure out what type of final expense insurance you would want (assuming you want a life insurance at all) is to think about the following questions.
- If you are unhealthy, then your only option may be the guaranteed issue option. That’s because it doesn’t factor in your medical history at all.
- A graded benefit policy might be your only option if you have preexisting medical conditions, like being in cancer remission, for example. If you still want final expense insurance, look into the graded benefit plans.
- If you are healthy and just want a smaller policy, then the standard final expense insurance policy will likely work well for you. The benefit is smaller and therefore the policies are easier to qualify for. If you are generally healthy and have no worry about qualifying for policies, it’s still better in the sense that the application process is less cumbersome. Insurance companies also tend to pay out these benefits faster than standard life insurance policies, partly due to the smaller amounts.
- Finally, if your needs are bigger and you can afford the higher premiums of standard life insurance, then you can basically skip the final expense insurance altogether. Apply for a standard whole life insurance policy, that will help your family keep the house, pay for college, and provide for more than just your funeral expenses.
The Bottom Line
My dad had a small life insurance policy that was paid out to my mom when he passed. One of the main reasons he decided to a policy in the first place was because of his smoking habit. He got the policy when he was relatively young. I wonder if he would have saved money if he just waited and got a final expense insurance policy when he got much older. It’s hard to say, and it’s all water under a bridge now. If you are thinking of getting a life insurance policy for any reason, then I urge you to check out the final expense insurance option before you decide to get standard life insurance. You just might save yourself, and ultimately your beneficiaries, some money.