Final expense life insurance is coverage specifically intended to pay the expenses that arise at the end of one's life, such as funeral costs. Final expense insurance products are characterized by a low face amount and ease of acceptance.
Why buy it? The obvious reason for final expense insurance is to ensure the availability of funds when the need for them arises. A better reason is that, with minimal planning, you can get a positive return on your investment. So if you don't have enough money to cover final expenses now, and if you don't anticipate having it in the future, your insurance can build a profit for you.
How much are typical final expenses?
Expenses that arise at the end of our lives are ones that we cannot work off later, so it's better to plan in advance for them. For most people, this includes funerary costs. For some, probate costs. For victims of accidents or disease, final expenses can include medical care. Nobody expects to be in this last group, but everybody can plan for it.
Funeral costs generally run between $1000 and $10,000, depending on how lavish the arrangements are: in addition to a burial plot, many funerals include a casket, service, transportation, bouquets, catering, etc. Face amounts on final expense policies generally run between $5,000 and $50,000, so there's a lot of wiggle room.
Final expenses may include but are not limited to:
Final medical expenses — The usual idea behind life insurance is to prepare for an untimely end. Untimely ends are usually caused by illness or accidents, which often precipitate formidable hospital bills.
Funeral costs — Even without the burial plot, the average cost of an American funeral exceeds $7,000. Add the cost of a grave, and your bill easily exceeds $10,000.
Probate costs — A number of bumps in the road may arise before one's heirs receive possession of an estate. Wills may be contested. Creditors may lay claim on properties. If probate becomes an issue, there will also be court and attorney fees to pay.
Who buys it?
Anyone is free to purchase and carry final expense life insurance, but the majority of buyers are those whose death is expected in the near future: the ill and the aged. (Most adults who do not fit into either of these groups probably plan to make long-term contributions as providers or caregivers; as such, the low face amount of final expense insurance products is probably insufficient for their coverage needs.)
The ill and the aged are two demographic groups with less-than-average insurability and, consequently, may find themselves denied coverage under ordinary life insurance policies. Fortunately, typical final expense life insurance products are issued without a medical exam or health questions. Final expense products generally fall under simplified issue, guaranteed issue (also called "guaranteed acceptance"), or graded benefit life insurance. These no-exam life insurance policies are more expensive than the norm, but because of final expense insurance's low face amount, they are still generally affordable.
Types of no-exam life insurance
Any life insurance product could potentially be marketed as final expense insurance, but as a rule, no-exam life insurance (a.k.a. nonmedical issue) is used. What distinguishes no-exam policies is that the individual proposed for coverage does not need to submit to a medical exam before approval.
The primary division within no-exam life insurance is that some policies involve minimal medical underwriting, whereas others involve at all. You see, even if the proposed insured does not undergo an exam in person, a life insurance company might still ask him/her questions about his/her physical condition and use those data to assign him/her to a health class. Guaranteed issue and graded benefit life insurance entail no underwriting (no health class assignment). Simplified issue life insurance does entail underwriting and tends to be cheaper.
Advertisements may say that application for guaranteed issue life insurance and graded benefit life insurance requires no health questions. That is true for the insurance company's purposes, but in fact, there are a very few screening questions which you must satisfy before you can apply for insurance. If you satisfy the screening questions, you may apply for the policy you want, and your application is guaranteed to be accepted.
Graded benefit life insurance differs from guaranteed issue life insurance in that the insured must be covered for a certain duration (usually two years) in order to qualify for a full death benefit. If the insured were to die shortly after receiving coverage, only a refund of premiums, plus a certain amount of interest, would be issued to the policy's beneficiaries.
Term vs. whole life insurance
Whether your policy requires medical exam, is simplified, or is guaranteed, you have a choice as to how long a contract you want. Even no-exam life insurance policies come in both term and whole life varieties (that does not signify that every company will sell both types, however).
Term life insurance products are cheaper, but there's a chance that your insured will outlive the coverage, leaving you will no return on your investment. Whole life insurance policies, on the other hand, are guaranteed to pay a death benefit, so long as you continue to pay the necessary premiums. However, whole life insurance is considerably more expensive. (The cost of universal life insurance falls between the two, but universal no-exam life insurance policies are not to be found.)
One insurance product which is particularly relevant to final expense planning is single-premium whole life insurance. With single-premium life insurance, you make only one payment, and you're guaranteed to receive a death benefit of a fixed amount (an amount larger than the single premium you paid). The only uncertainty is just when the insured will die. This is a pretty fool-proof way to get a positive return on investment.
Alternatives for your final expense planning
Instead of buying life insurance—or in conjunction with buying life insurance—to manage your final expenses, consider making plans with a funeral service agency. You can pay in advance for the services you desire, or you can designate the funeral agency as the beneficiary of your life insurance policy. Some funeral service agencies can even provide you with funeral insurance through an employee licensed to sell life insurance. With any of these three cases, you have the ability to make sure in advance that all of the necessary funds are managed and that the services of your choosing are arranged.
A final word about final planning
Make sure that your survivors know what's been arranged so that they don't buy you additional services from another funeral home! Also, make sure that you understand what you've paid for. Otherwise, your survivors might expect all of your final costs to have been paid when in fact only a burial plot has been arranged for.