burial insurancefinal expense insurance

Alternatives to Final Expense Insurance

Alternatives to Final Expense Insurance

Final expense insurance is also called funeral insurance or burial insurance. This type of insurance is simply a life insurance plan with a low face amount.  For most people other types of life insurance will be better choices.

These small death benefit contracts is typically sold to an insured with the idea that the the beneficiary or loved ones left behind cannot afford the funeral and burial costs (currently averaging around ,000),   The insurance plan is designed to help the family take care of those expenses.  There are several drawbacks that are rarely mentioned, however. 

When a beneficiary is named on the contract, and the contract pays the death benefits, the money belongs to the beneficiary.  They can use the life insurance proceeds any way they wish – there is no legal obligation or requirement that that they cover the decedent’s final expenses. 

If the estate is named beneficiary, then the money must be used to pay ALL debts of the estate.  This means that, depending on the financial status of the recently departed, and how the assets are allocated towards debts,.  There may be no money left over to pay for funeral costs.

More importantly it’s very uncommon for the only financial need of the loved ones left behind to be the funeral costs.  If the family needs help paying final expenses, most likely there are going to be other expenses of equal or greater importance that need to be paid for. This may include house payments, groceries, additional child care costs.  Anything that the deceased’s income used to pay for will need a different source of funds. 

Lastly, the cost of insurance for these particular types of contracts, relative to the coverage amount, is very expensive.  Sometimes it’s disguised by breaking the payments up by the month, or by having preset “age group” rates where as the insured ages, the rates automatically go up.

One advantage to this type of plan, is because it is written for a relatively low face value, the underwriting process is more lenient.  You can buy a final expense life insurance contract as either a whole life contract or a term contract (which typically will expire and be non-renewable after the age of 80).  There is no medical examination, simply a few medical questions that have to be answered.  Accordingly, these insurance policies will either have a waiting period before the death benefit will pay out (typically two years), or will have a graded death benefit payment over several years, until the full death benefit amount is payable.  This helps reduce the adverse selection losses where people wait until they have a serious illness before purchasing insurance coverage.

Just like any other kind of insurance, life insurance is a tool – a financial tool.  In order to select the proper tool, the job must first be defined and defined carefully.  Is there a time in the foreseeable future when insurance won’t be needed?  If the goal of the insurance is to put children through school, the answer is yes.  If the goal is asset transfer outside of the estate, to avoid paying estate taxes, the answer is no.  

Once the goal is set, the next step is comparing product features and pricing.  If the cost of a ,000 policy is close to the cost of 0,000 of coverage for a similar time period, obviously the larger policy amount is the better buy.  Of course, the larger contract amount will require more medical information, and it’s possible a potential insured cannot qualify for the larger amount based on health status.  The point, of course, is to compare alternatives, both cost and coverage, to the Final Expense Insurance, to see which one fits both the goal and the budget.  An insurance agent, familiar with both your goals and personal situation, is the best place to start discussing available options.

You can get life insurance quotes from the author’s website.  Alston J. Balkcom has also written about What Is An Insurance Premium