Alternatives to Final Expense Insurance
Article by Alston J. Balkcom
The life insurance category known as final expense coverage is also called funeral insurance. This kind of insurance is simply a life insurance policy with a small death benefit. Most people will find that other kinds of life insurance will be better choices.
This type of life insurance is typically sold to an insured with the idea that the the policy holder’s family cannot afford the burial costs (currently averaging around ,000), The insurance policy is designed to pay for that expense. There are several drawbacks that are rarely mentioned, however.
When a beneficiary is named on the contract, and the plan pays the face amount, the money belongs to the beneficiary. They can use the money any way they choose – there is no legal obligation or requirement that that they cover the costs of the funeral.
If the estate is named beneficiary, then the proceeds 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,. Funeral costs may not be paid for..
Another crucial factor it’s very uncommon for the cost of a funeral to be the only obligation left behind. 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 utility costs, taxes, additional child care costs. Anything that the deceased’s income used to pay for will need a different source of funds.
Finally, the cost of insurance for these particular kinds of plans, 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.
A benefit to this kind of contract, 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 policy (which typically will expire and be non-renewable after the age of 80). There is no medical exam, 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 terminal condition before buying insurance coverage.
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 the annual cost. If the cost of a ,000 plan 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 plan 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. Exploring all your life insurance options with a broker face-to-face or online is important if you want to make the best decision.
About the Author
You can get life insurance quotes from the author’s website. Alston J. Balkcom has also blogged about disability insurance for the self employed