American journalist Frank McKinney said over a hundred years ago, “Fun is like Life Insurance, the older you get the more it costs.” While a funny limerick at the time, insurance companies have adapted from this concept.
What is one to do if they have gone their whole life without purchasing any type of life insurance and have loved ones they need to protect? Years ago there were not many options for seniors who found themselves in this situation, Life Insurance late in life was typically very costly and thus not an option for seniors. This is why many insurance companies today now offer Final Expense or Burial Insurance.
What is Final Expense Insurance?
Traditional life insurance, whether it be term life, whole life or universal life policies have been around forever and are designed to offset the earning power and life value of its policyholder. They are in place to cover loss of income, mortgage costs, college tuitions, etc. and can have death benefits in excess of a $1,000,000.
Unlike traditional life insurance, Final Expense policies are designed to offset potential medical bills, small debts and most importantly the cost of a funeral, burial or cremation. These types of policies have a much smaller face value ranging anywhere from as low as $2,000, going as high as typically $30,000 depending on the insurer.
Prior to the popularization of Final Expense products being offered by insurance companies, a lot of folks went directly to a funeral home and purchased what is called a Pre-paid funeral plan. These types of plans are typically paid in full upfront and the funeral home becomes the beneficiary of that plan to use for the cost of your service.
There are some pitfalls to this option. As was already mentioned, the beneficiary of your policy is the funeral home. What happens to that money if it is mishandled or misappropriated, if the funeral home goes out of business or if you, the policyholder, were to move?
Also, most of these plans only cover the agreed upon price at the time of purchase and may not account for inflation. So a desired funeral service may have one cost at the time of purchase and may cost something considerably different years down the road when it is time to put that plan in motion.
Lastly, when buying a pre-paid funeral plan, the death benefit of that plan can only go towards the cost of the funeral services. There is nothing to be passed on to family members to offset other costs associated with your passing.
This is where insurance companies saw a gap in what was available to seniors and began offering Final Expense policies. Final Expense insurance differs drastically from how pre-paid funeral plans work at almost every turn. First, insurance companies are monitored and regulated by the state. If a company were to go bankrupt, it is up to the state to step in and use it’s guarantee fund to protect policyholders so your policy is always protected.
Next, with a Final Expense policy, you as the policyholder get to dictate who your beneficiary is. You can name one person as the beneficiary of your policy or you can spread the death benefit out to many members of your family. You can even name contingent beneficiaries just in case something were to happen to your primary beneficiaries and you are able to change these distinctions at any time as life changes occur.
Unlike a Pre-paid funeral plan, Final Expense policies can cover costs beyond that of a funeral or cremation service. Maybe you have a small credit card debt, existing medical bills or even would like to leave your family some financial assistance. These are all options you have as the owner of a Final Expense policy.
Another convenience to Final Expense is the surprisingly low premiums associated with these plans. Never has life insurance been more affordable and this applies to Final Expense policies as well. Unlike a pre-paid funeral plan, you aren’t required to make an initial large investment; instead you can pay a much lower monthly premium.
Now that you are comfortable with the differences between traditional life insurance, final expense insurance and pre-paid funeral plans the big question now is; “Do I need it?”
Insurance needs are different for everyone. The level of coverage one needs differs from family to family and person to person. Today a bare bones funeral, depending on where you live, typically runs about $6,000 but that can easily get upwards of $10,000 after you factor in flowers, a catered memorial, obituary notice and additional services. Unfortunately, Social Security is not properly funded to offset these costs and will typically only pay around $300 at the time of your death.
There are 3 types of responses I hear when discussing Final Expense policies with my clients:
“I’ve had a life insurance policy for years and I don’t need anymore.”
“I have money set aside for those costs.”
“I want a minimal affair, my kids can bury me in the backyard.”
Knowing about Final Expense options can help address all three of these concerns. If you’ve had a policy for years that you’re still paying on, it may have built in cash value that you didn’t even realize. Maybe you’re over insured with a large whole life or universal life policy you bought early in life and no longer need to worry about the mortgage payments, your children’s tuition, your loss of income, etc.
If you’re in this situation, you can roll the cash value of your existing policy into a single premium Final Expense policy with it not even affecting your monthly expenses. And unlike a pre-paid funeral plan where a $10,000 initial investment will yield $10,000 worth of services, insurance companies will significantly pad your death benefit if you elect to purchase a single premium plan. For example, if a 65 year old male in Pennsylvania were to buy a $10,000 single premium Final Expense policy, the death benefit for that plan would be over $16,000!
“I have money set aside for my funeral services.” It’s great that you’re in a position to have adequately saved and planned for this event, however the money you put aside for your funeral may not go immediately to your heirs. It will have to pass through probate along with the rest of your estate, and while that happens who will pay the out of pocket expenses associated with your passing?
A Final Expense policy not only addresses this issue by being paid out immediately at the time of your passing, but as previously stated can also help maximize the finances you did put aside. What if, instead of putting $10,000 aside for your funeral, you took out a $10,000 policy at $40/month and passed away 5 years later? You would have spent $2,400 of the $10,000 set aside and now your heirs receive a $10,000 death benefit and there’s still $7.600 sitting aside in a separate account.
Lastly, a common joke I hear when talking with clients regarding Final Expense insurance is, “They can bury me in the backyard.” Much like weddings, people tend to overspend at funerals. Our loved ones want the ceremony to reflect their feelings they have and provide a service to honor your life. While you may have a minimalist approach to your burial, chances are your loved ones will want to make a gesture commensurate to love they have for you.
These are all items to take into account when deciding if you need a Final Expense insurance plan and there are many companies out there who offer these types of plans. Please don’t be fooled by commercials you see on TV that advertise for plans that offer guaranteed acceptance. Despite sounding like an incentive to you as the consumer, that isn’t necessarily the case.
When purchasing any type of insurance plan, you want to be asked health questions because if you pass you will qualify for lower premiums. These are all items our team of Licensed Insurance Brokers at BGA Insurance Group can help go over with you. Call to book a free review and we will go over all of your options and find a plan that fits your needs and your budget.
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