Final Expense Insurance: What You Need To Know
As you know, it’s always best to do your homework before you buy so let’s start with the basics and work our way from there.
What is Final Expense Insurance?
Final expense insurance is a permanent whole life insurance policy designed to cover the cost of your funeral and other end-of-life expenses, such as, medical bills, legal fees, housing costs and any other remaining bills. Burial insurance and funeral insurance are other commonly used terms for final expense insurance. Another familiar term is preneed insurance but that is a different type of policy. Preneed insurance is tied to a prearranged contract for funeral goods and services where the beneficiary is typically the funeral home or other funeral provider.
Term life insurance policies are not true final expense policies because they terminate at a certain point in time – i.e, either at a specific age or after a specific number of years. For example, term life policies may be for 10, 15 or 20 years or terminate at age 70, 75 or 80. Whereas, a permanent whole life policy will be available until the insured dies or at policy maturity, provided that the premiums are paid in full.
Typical characteristics of final expense policies are:
- Face amounts between $1,000 to $50,000
- Simplified or guaranteed issue (more on this below)
- Coverage for the life of the insured (may be limited to 100 years old or more)
- Accumulates cash values (typically)
- Not linked to a prearranged funeral contract.
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How do I apply for final expense insurance?
Applications for final expense policies fall into 2 basic categories.
Simplified issue policies. Final expense insurance policies are usually issued on a “simplified” basis. “Simplified” means that medical exams are generally not required to obtain coverage, although the applicant will have to answer certain medical questions. Also, when reviewing applications the insurance companies rely Medical Information Bureau (MIB) reports, prescription checks (known as script searches), and interviews or any combination thereof. According to recent studies, over 90% of final expense policies were simplified issue, most of the remainder were guaranteed issue.
Guaranteed issue policies. A Guaranteed Issue policy will generally be issued without the need to answer any medical questions. They are usually restricted to a narrower range of ages such as 40 to 80 years old and often are capped at $25,000 of coverage. Many Guaranteed Issue policies do not distinguish between smokers and non-smokers whereas Simplified Issue policies usually do.
What questions will I be asked on an application?
Many companies start their applications with their disqualifying questions and gradually work up to the questions that will allow for the carriers best level pricing if answered non-adversely.
Applicants will be asked medical and non-medical questions on the application. The questions typically gather information about the following demographic and non-demographic items:
- Date of Birth
- Tobacco use
- A medical history and medication consumption for the conditions listed previously
What does final expense insurance cover?
Covering the cost of a funeral is typically the major motivation for purchasing a final expense policy. With the cost of a traditional funeral often exceeding $10,000, this is a major concern for most of us. But there are other bills that may remain to be paid at the end of our lives. Common end-of-life expenses include medical bills, professional fees for handling the estate, credit card bills, household and other costs of living, as well as the cost of clearing out the household. Final expense policies are intended to cover these costs so the decedent’s estate is not depleted and her/his family does not have to bear the financial burden.
How are death benefits paid?
The payment of death benefits depends on the type of policy.
Level Benefit Policies. A Level Benefit Policy will pay the full death benefit from Day One (the issue date of the policy), regardless if the death is due to natural causes or an accident. In this case, the death benefit is the face amount of the policy. The approval of a Level Benefit Policy will depend on the applicant’s answers to the medical questions. Unfavorable answers to certain of the medical questions may not disqualify the application but may require high premiums and/or limit the amount of coverage that will be approved. Most level policies are available from age 18 to 80 or 85.
Modified Benefit Policies. There are various types of Modified Benefit Policies but what they have in common is that the death benefit is reduced for a period of time after issue, typically 24 to 36 months. This is known as the “restriction period.” The reduced death benefit applies to a death due to natural causes. Generally, an accidental death during the restriction period will qualify for the full death benefit regardless of when the death occurs. Modified Benefit Policies may be Simplified Issue or Guaranteed Issue.
The terminology used by insurance companies for their Modified Benefit Policies can get confusing. They may be called Graded Benefit Policies because the benefit is reduced by set percentages during the restriction period. For example, let’s assume we have a Graded Benefit Policy that pays 30/70/100. Therefore, it will pay 100% of the face amount if the death is accidental starting when the policy is issued. But if the death occurs by natural causes, the death benefit is reduced to 30% of the face amount in the first policy year, 70% of the face amount within the second year, and 100% thereafter.
Similarly, Return of Premium (ROP) Policies provide a simple return of the cumulative premiums paid to date plus some predetermined interest rate if the death occurs during the restricted period (e.g., in the first 2 or 3 years). For example, let’s assume we have a ROP policy that is 10% simple, 24-month ROP. Like the Graded Benefit Policy example, it will pay 100% of the face amount if the death is accidental starting when the policy is issued. But if the death occurs by natural causes within the first 2 policy years, it pays only the cumulative premiums with simple compounding of 10% interest.
Be sure to check the details of the policy because some insurance companies may simply call it a “Graded Policy” when it has a Return of Premium provision. ROP Policies are typically easier to qualify for because they are only returning premiums if death occurs in the first 2 or 3 years, whereas, a true Graded Benefit Policy is paying a percentage of the face amount during the restricted period.
How do I file a death benefit claim?
The payment of death claims is subject to a review by the insurance company. A claim form must be completed and filed by the named beneficiary(s) along providing a certified death certificate. The insurance company may also request the original policy so it’s a good idea to let your beneficiaries know where the policy is located. The death benefit proceeds are not taxable, however, any interest paid is subject to federal and state taxation and thus the named beneficiary(s) may also have to fill out IRS Form W-9.
When purchasing a final expense policy be aware that all life insurance policies contain a contestability clause. This gives Insurance companies the right to examine and contest claims within certain periods, usually 2 years. If death occurs within two years of the application or reinstatement date, the insurance company has the right to conduct a review to confirm that there was no material misrepresentation on the application that would have caused it to decline issue or reinstatement of the policy. The clause also protects insurance companies from financial losses due to fraudulent claims. Even beyond two years, insurance companies can still take legal action if fraud comes to light. Be sure to fully disclose all requested information accurately on an insurance application. When an insurance company exercises this right to contest the claim, a HIPAA compliant authorization to disclose medical information will be required in addition to the claim form and the certified original death certificate.
When will the death benefit be paid out?
Insurance companies usually pay out death claims in 24 hours after claim approval. However, a claim during the contestability period is likely to be more complex and could take quite a while. This could be a problem because funeral homes, cemeteries and other funeral service providers expect to receive payment in full at the time of the funeral. While check and credit card are the typical forms of payment, some funeral providers will accept assignment of life insurance proceeds. A funeral provider assignment is a written agreement between a beneficiary and a funeral provider authorizing the insurance company to direct payment of some or all of the policy proceeds to the funeral provider. The insurance company may honor the assignment and pay the funeral provider before the claim is settled in full.
Who can be a beneficiary of my final expense policy?
You can name any individual or individuals as the beneficiary of your policy. However, there are legal considerations when naming a Trust as owner or beneficiary, and naming minor children or their guardians as beneficiaries. In these cases it’s best to seek the advice of a qualified estate-planning attorney.
Where do I buy final expense insurance?
Most insurance policies are purchased through licensed insurance agents. The type of agent you are dealing with will affect the insurance options that they present to you. The types of insurance agents that you may encounter include:
Independent Agents – these agents sell the products of several insurance companies, therefore, they can present you with the most options. Independent agents represent their clients, so they can search the market on your behalf. They earn commissions on the policies they sell.
Exclusive or Captive Agents – these agents represent only 1 insurance company. They earn commissions on the policies they sell.
Direct-writing Agents – these agents sell from an insurance company’s office. They may be paid a salary by the insurance company rather than commissions.
Also, policies may be sold directly to the public by the insurance company through direct mail, or advertisements in print publications and on the internet. There is no agent involved in these “direct response” sales.
Can I buy final expense insurance from Funeralwise.com?
Funeralwise.com is a licensed insurance agency. We are an independent agency representing several insurance companies. However, our primary business is to serve the public as a funeral information and planning resource. We believe this uniquely positions us to offer a sensible, planning-based way to shop for insurance to cover your final expenses. We offer final expense insurance because it is one of the ways that people can plan ahead for the payment of their funeral costs and other final expenses.
Our online planning tools, forms, guides, and forums provide unmatched support to guide you and your family along the way. You can get all of that and more if you qualify for our Wise Protection Plan. Our network of Preplanning Specialists can help you find the best policy for your particular situation.
Try our Funeral Insurance Finder
If you are ready to start shopping for final expense insurance, give our Funeral Insurance Finder a try. Our easy-to-use tools will help you estimate your funeral costs and other final expenses and provide you with an instant quote for several top quality policies.