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Why is Financial Expense Insurance important?
There is an emotional and financial burden that arises after a loved one dies. Grieving becomes especially challenging because important financial decisions have to be made, but who will take ownership of the financial burden? Who will pay when friends and family want a funeral, so they can mourn as a community? Who will be responsible for final medical bills? In an ideal situation, the family is large enough to share the financial burden. However, everyone’s financial situation may be different.
Planning for end-of-life costs can be unpleasant, but consider this process as planning for a rainy day. Planning ahead does not mean tragedy is approaching. Planning ahead means that you’ve experienced what it’s like to lose someone close, and you know the financial headache that comes along with it. Final Expense Insurance is an umbrella for friends and family. We never know when it’s going to rain, but we do know that when it rains it pours. Anyone who is 50 years old or older should consider Final Expense Insurance unless they already have an alternative plan in place.
What is Final Expense Insurance?
Final Expense Insurance is a smaller kind of life insurance that is commonly used to pay for end-of-life costs such as a funeral, burial services, cremation, final medical bills, etc. Final Expense Insurance policies generally have a small face amount ranging from $5,000-$40,000.
The coverage for Final Expense Insurance starts once your application is approved. The coverage does not end as long as the monthly payments are made. Your beneficiaries will ultimately receive the money to cover the end-of-life costs, which will put less financial burden on your family.
How much do end-of life expenses generally cost?
The National Funeral Directors Association provided a breakdown of the cost for average common funeral types. Based on their findings, the average funeral can cost, at minimum, between $8,000 and $10,000, not including final medical bills. In addition to a funeral, added final medical expenses, burial expenses, transportation expenses, and religious-specific expenses can add up. Please note the costs may not account for all charges. Costs are expected to rise as time passes.
What are the types of Final Expense Insurance?
- Guaranteed Issue—Guaranteed Issue Final Expense Insurance is designed for high-risk individuals who may have significant underlying health conditions. The approval rate is high, and anyone can apply despite how poor their health may be. Guaranteed Issue Final Expense Insurance generally has higher costs compared to traditional term life insurance, and the payouts are limited. A medical examination is not required; however, applicants must complete a short health questionnaire. Generally, the benefit has a maximum limit of $25,000. Applicants who already have a terminal illness generally do not qualify.
- Simplified Issue—Simplified Issue Final Expense Insurance is designed for moderate-risk individuals who may have some underlying health conditions and do not qualify for traditional life insurance. A medical examination is not required; however, applicants must complete an extensive health questionnaire about their health history and current medical conditions. Generally, most policies have a maximum benefit of $50,000. Applicants who already have a terminal illness generally do not qualify.
What factors affect the cost of Final Expense Insurance?
Final Expense Insurance generally costs more than term life insurance. Final Expense Insurance is usually purchased by individuals who do not qualify for traditional life insurance due to moderate or high-risk underlying health conditions or are older than traditional applicants. The older you are when you initially purchase traditional term life insurance, the higher the premiums will be. In a worst case scenario, the insurance companies may decide not to insure you. The main factors that affect how much the insurance premiums will cost are:
- Pre-existing health conditions
- Age (generally 50 years and older)
- Gender
- Amount of coverage
What are the benefits of Final Expense Insurance?
- Premiums generally stay level and do not increase significantly.
- The payout is guaranteed as long as the premiums are paid on time.
- The premiums can be paid monthly or annually.
- The beneficiaries have flexibility and can choose whether or not they want to use the death benefit for burial expenses.
What is the main alternative to Final Expense Insurance?
The main alternative to Final Expense Insurance is preneed insurance. Preneed insurance plans are prepaid funeral plans sold through a specific funeral home. Prepayments are made while the purchaser of the insurance is still alive. Preneed insurance generally refers to plans that are meant to cover costs specifically associated with funeral and burial services. The beneficiary in the preneed insurance plan is usually the funeral home, which means that the funeral home receives any benefit payments.
Final Expense Insurance is much more flexible compared to preneed insurance. The beneficiary for Final Expense Insurance can be anyone. The purchaser of the insurance can purchase the insurance through a broker from any insurance company that offers the product. The benefit payments received from Final Expense Insurance can also be used for more than funeral or burial costs. The additional end-of-life costs that can be covered under Final Expense Insurance include legal fees, final medical bills, etc.
What are the main differences between traditional life insurance and Final Expense Insurance?
Traditional life insurance policies require a lengthier application process, a medical examination, and a detailed review of the applicant’s personal life as required by underwriting. There is no guarantee that the insurance companies will approve a traditional life insurance policy if the applicant is moderate or high-risk health-wise or is older than standard applicants.
Below are the major differences between Final Expense Insurance and preneed insurance
| Preneed Insurance | Final Expense Insurance |
|---|---|
| Purchased from a specific funeral home | Purchase from an insurance company |
| Paid ahead of time to funeral home | Payout is provided to beneficiary |
| Costs of guaranteed services will be covered by funeral home even if prices increase | Flexible benefits. Can be used to cover more than funeral and burial costs |
| Non-guaranteed services may have to be covered by family and paid to funeral home | Benefits can be paid to anyone and are not tied to one specific funeral home |
| The details of prepaid services are dependent on the specific funeral home and may vary | The terms of the insurance apply to all policy holders |
Guaranteed Issue Final Expense Insurance
Who is the ideal candidate for Guaranteed Issue Final Expense Insurance?
Generally, Guaranteed Issue Final Expense Insurance is viewed as a last resort. The applicants are considered high risk by insurance companies due to significant pre-existing underlying health conditions, the older age of applicants who are currently in, or those approaching their elderly years. The increased risk results in high premiums for traditional life insurance or makes the applicant uninsurable for traditional life insurance with high death benefits. The insurance companies do not want to take on the risk. A last resort option is better than leaving a financial burden on the remaining family members in the unfortunate event that an end-of-life event occurs. The ideal applicant is between 50 years old and 80 years old.
What are the main characteristics of Guaranteed Issue Final Expense Insurance?
- Guaranteed Issue Final Expense Insurance is a last resort insurance option if an applicant is unable to qualify for traditional insurance.
- Generally, applicants are guaranteed approval unless the applicant has a pre-existing terminal or mental illness.
- There are age, state of residency, and citizenship status requirements.
- Premiums are higher than traditional term life insurance, and the death benefit is lower.
Below is a high-level breakdown of Guaranteed Issue Life Insurance
- Application process—A basic application is filled out and generally does not include health-related questions. However, the insurance company may inquire about terminal illnesses. There is no medical exam or waiting period. The approval rating is high among applicants.
- The death benefit is paid out to your beneficiary. The maximum payout is generally $25,000.
- The policy stays active as long as the premiums are paid.
- The applicate can designate anyone as a beneficiary, including a funeral home.
- Some policies may have graded death benefit clauses.
What are graded death benefits?
Due to the majority of applicants being high risk in nature, some of the Guaranteed Issue Life Insurance policies have graded death benefits. Graded death benefit clauses require that the policy holder pay two years’ worth of premiums before the full death benefit can be paid out to the beneficiary.
As an example, let’s assume John purchased a $5,000 Guaranteed Issue Life Insurance policy that was approved to begin on March 1, 2022. Let’s also assume that the insurance company added a graded death benefit clause to John’s policy. John would have to pay his insurance premiums until March 1, 2024, for his beneficiary to receive the full $5,000. If John were to pass away prior to March 1, 2024, then John’s beneficiary would only receive back a refund of 110% of the premiums John paid into the policy. If John paid $400 in premiums for the first 2 years he owned the policy, then his beneficiary would receive 110% of $400, or $440.
How much do Guaranteed Issue Final Expense Insurance policies generally cost?
Based on the latest publicly available information, the cost of Guaranteed Issue Final Expense insurance can range from as little as $30 to over $500 each month. The cost of insurance is dependent on the amount of coverage purchased, the age of the applicant, and the gender of the applicant.
Simplified Issue Final Expense Insurance
Who is the ideal candidate for Simplified Issue Final Expense Insurance?
Simplified Issue Final Expense Insurance applicants generally have a challenging time qualifying for traditional life insurance due to moderate-risk underlying health conditions. Simplified Issue Final Expense Insurance is also referred to as Simplified Whole Life Insurance. The insurance is a permanent insurance policy that has a smaller benefit amount compared to traditional insurance.
Guaranteed Issue Final Expense Insurance is considered a last resort for applicants who are significantly older or have severe underlying health conditions. Simplified Issue Final Expense Insurance is a step above Guaranteed Issue Final Expense Insurance. Both insurance options are considered last resort options, but applicants who qualify for Simplified Issue Life Insurance are not as old and are considered less risky compared to applicants who only qualify for Guaranteed Issue Final Expense Insurance.
What are the main characteristics of Simplified Issue Final Expense Insurance?
- A medical examination is not required. However, applicants have to fill out a detailed medical questionnaire.
- Applicants with terminal illnesses and specific types of cancer generally do not qualify.
- In comparison to Guaranteed Issue Final Expense Insurance, Simplified Issue Final Expense Insurance premiums cost less.
- Applicants who qualify generally have only moderate-risk underlying health conditions.
- Unlike traditional permanent/whole life insurance polices, Simplified Issue Final Expense policies do not have a “cash value.” The applicant will only pay monthly premiums, and the beneficiary will only receive face value of the policy.
What is Simplified Whole Life Insurance?
Simplified Whole Life Insurance is a permanent life insurance policy that lasts your entire life. The insurance has a smaller death benefit compared to traditional life insurance and generally has less perks. The average applicant is usually at least 45 years old with moderate-risk underlying health conditions that may disqualify them from being approved for traditional life insurance.
A medical exam is not required during the application process, but a detailed medical questionnaire must be completed by the applicant. Generally, a high majority of applicants qualify as long as they do not have severe underlying health conditions or specifically identifiable medical conditions that a traditional insurance company would not approve. Due to the moderate-risk underlying health conditions of the applications, insurance premiums generally cost more than traditional life insurance.
Although there is a high approval regarding Simplified Issue Final Expense Insurance because there is no formal medical evaluation required, there are still disqualifying conditions. If the medical conditions are too severe for approval, then the only remaining option would be for the applicant to try to obtain a Guaranteed Issue Final Expense Insurance option as the final alternative.
Below is a high-level breakdown of Simplified Issue Final Expense Insurance
- Application process—An application is filled out. A medical exam is not required, but a detailed medical questionnaire has to be completed.
- If approved, the maximum benefit generally allowed for purchase is $50,000.
- The policy stays active as long as the premiums are paid.
- The applicant can designate anyone as a beneficiary, including a funeral home.
- Some policies may have graded death benefit clauses. The graded death benefits may apply to both Guaranteed Issue and Simplified Issue Final Expense Insurance. If the applicant passes away before paying at least 2 years’ worth of premiums, then the beneficiary will only receive a refund of the premiums paid at 110% return.
What are the common reasons that may disqualify applicants from being approved for Simplified Issue Final Expense Insurance? (If any of the following apply to you, Guaranteed Issue Final Expense Insurance may still be an option.)
- Having a terminal illness.
- Being diagnosed with any form of cancer in the past 2 years.
- Having or being advised to have a non-routine surgical procedure.
- Having heart surgery or being diagnosed with heart disease in the past 12 months.
- Requiring oxygen assistance.
- Being bedridden in a long-term care facility such as a nursing home.
- Having or being diagnosed with a cognitive illness such as Alzheimer’s disease or dementia.
What additional benefits does Simplified Issue Final Expense Insurance have that Guaranteed Issue Final Expense Insurance does not have?
Simplified Issue Final Expense Insurance includes additional add-ons called riders. Riders are additional perks that applicants can purchase to add to the insurance policy. Consider the Simplified Issue Final Expense Insurance as a basic cheese pizza. Riders are the toppings to the pizza that add extra coverage for additional costs that the applicant would have to pay in addition to the insurance premium. Riders add extra protection and customization to meet the applicant’s needs. Below is a listing of common riders:
- Long-Term Care Rider—If the policy holder needs long-term care coverage at some point in time, they can use the benefit from the insurance policy to cover long-term care costs. The long-term care cost can include home-based care (e.g., home health aide) and facility care (e.g., nursing home). As the insurance benefit is used to cover long-term care services, the death benefit that the beneficiary would receive will decrease by the same amount. As an example, let’s assume John has a Simplified Issue Final Expense Insurance policy with a $50,000 insurance benefit and a long-term care rider. John needs to use $30,000 of the insurance benefit to cover his nursing home costs. When John passes away, John’s beneficiary would only receive $20,000.
- Disability Waiver of Premiums—In the event a policy holder becomes unable to pay the insurance premiums due to a loss of income resulting from a disability, a disability waiver rider allows the policy holder to not pay premiums without the insurance policy being canceled until recovery. Once it is determined that the policy holder has recovered, they have to resume paying the premiums.
- Accelerated Death Benefit Rider—If the policy holder is diagnosed with a terminal illness while the policy is active, the policy holder may use the insurance benefit to cover medical costs.
