Recently, we experienced the anguish of losing my father. Fortunately, our financial situation was stable enough that we didn’t have to fret about funeral expenses. In fact, my sister even wished we had opted for a larger reception room at the funeral home, as a greater number of people attended than we had anticipated. This was despite the concerns and protocols related to the pandemic.
Nevertheless, I witnessed firsthand how nearly every aspect of a funeral comes with a hefty price tag. From attire to flowers to candles to cosmetics, the costs escalate when associated with a funeral. What seemed like a relatively modest funeral for my father quickly amounted to several thousand dollars. And it could have easily been much higher. It’s no surprise that many families find it challenging to afford such a sudden and significant expense.
What is Final Expense Insurance?
Fortunately, recognizing the necessity, the insurance industry introduced final expense insurance, also known as “burial insurance” or “funeral insurance”. Essentially, it’s a form of whole life insurance policy with lower premiums and a smaller payout. What makes final expense insurance appealing is its accessibility; these policies are typically easy to qualify for. Some providers even waive the medical exams typically required for traditional life insurance policies. In some cases, there’s no need to answer any medical questions at all.
Moreover, there are no restrictions on how you can utilize the funds provided by the policy. While the intention is to cover funeral costs, you’re free to allocate the money as you see fit, whether for funeral expenses or even a new iPad (though it’s advisable not to neglect funeral costs). Similar to life insurance, final expense insurance pays out upon the policyholder’s death, without the need to furnish receipts or undergo any additional procedures. The insurance company will simply issue a check for the agreed-upon amount.
Limitations of Final Expense Insurance
No, you can’t simply purchase final expense insurance when you’re on your deathbed and expect a payout.
Upon learning about the advantages of final expense insurance, I pondered if there were any loopholes. Could one wait until a parent or relative was nearing the end of their life? Could they still acquire it after experiencing a major medical event like a stroke or heart attack? What about following a terminal illness diagnosis?
For instance, both my grandfather and father-in-law spent months in the ICU before passing away. Couldn’t either of them have added a final expense policy during their dire circumstances? After all, they wouldn’t be able to pay the premiums for much longer, and their families would receive the additional payout. However, wouldn’t this be gaming the system? If numerous individuals did this, wouldn’t it lead to bankruptcy for the insurance companies?
As it turns out, insurance companies have anticipated such loopholes. I discovered that although most standard policies don’t mandate a medical exam and won’t review medical records, they do require applicants to complete a health questionnaire for eligibility assessment. While there are special policies that omit the questionnaire, they typically include a waiting period. In other words, they won’t provide payouts unless at least two to three years have elapsed. Hence, you can’t rush to obtain funeral insurance immediately following a terminal cancer diagnosis.
Graded Benefit vs. Guaranteed Issue vs. Standard Policy
If you have significant health issues, you may not meet the eligibility criteria for standard final expense insurance. In such situations, you’ll likely seek policies that don’t necessitate a health questionnaire. These are typically referred to as “guaranteed issue” policies. Despite their appeal, guaranteed issue policies come with a waiting period, during which the benefit won’t be paid if the policyholder passes away within a specified timeframe. While the premiums for these policies are generally higher, there’s a silver lining: if the insured individual dies during the waiting period, the premiums are refunded with interest. Though they may not cover funeral expenses entirely, at least they aren’t lost permanently.
Alternatively, there’s a middle-ground option for final expense insurance known as graded benefit insurance. Unlike the binary nature of the other two options, a graded benefit policy offers a more nuanced approach. It disburses a portion of the policy’s benefit based on the duration of premium payments. For instance, it might pay out one-third of the total amount if the insured individual passes away within the first year, with the payment increasing to two-thirds in the second year. Eventually, the full benefit becomes available (presumably once the insurance company is assured of making a profit). While you still need to meet health-related qualifications for a graded benefit policy, the requirements are typically less stringent than those for a standard policy.
Which Option Should You Pick?
Final expense insurance, being a type of whole life insurance, essentially falls into four categories that function similarly. In essence, with whole life insurance, once you qualify for a policy, you commit to paying a predetermined monthly premium indefinitely. Upon your passing, the policy disburses a predetermined sum to your beneficiaries.
To determine which type of final expense insurance suits your needs (assuming you desire life insurance at all), consider the following questions:
- If you have health concerns, your sole option may be the guaranteed issue option, as it doesn’t take your medical history into account.
- A graded benefit policy might be the only viable choice if you have preexisting medical conditions, such as being in cancer remission. If you still seek final expense insurance, explore graded benefit plans.
- If you’re in good health and seek a smaller policy, the standard final expense insurance policy is likely suitable. The benefits are smaller, making these policies easier to qualify for. Moreover, if you’re generally healthy and don’t anticipate qualification issues, this option offers a less cumbersome application process. Insurance companies also tend to disburse benefits from these policies more swiftly than those from standard life insurance policies, partly due to the smaller amounts.
- Lastly, if your insurance needs are greater and you can afford the higher premiums of standard life insurance, you might opt to forego final expense insurance altogether. Instead, consider applying for a standard whole life insurance policy, which can assist your family in retaining the house, covering college expenses, and providing for more than just funeral costs.
In Conclusion
When my dad passed away, my mom received a small life insurance payout from a policy he had taken out. One of the main reasons he opted for the policy initially was due to his smoking habit. He acquired the policy at a relatively young age. I sometimes wonder if he could have saved money by waiting and obtaining a final expense insurance policy when he was older. However, it’s all in the past now.
If you’re considering purchasing a life insurance policy for any reason, I encourage you to explore the final expense insurance option before committing to standard life insurance. You might just end up saving yourself, and ultimately your beneficiaries, some money.