Final Expense Life Insurance - a Mistake?

Final expense insurance is also called funeral insurance. This type of insurance is simply a low value life insurance contract. For most people other types of life insurance will be better choices.

A policy of this sort 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. This averages around $8,000. The insurance contract is designed to cover those expenses. There are some drawbacks to this type of policy, however.

Once a beneficiary is named on the contract, and the contract pays the death benefits, the money belongs to the named beneficiary or beneficiaries. They can use the proceeds any way they wish – 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..

Additionally and more importantly 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 ongoing expenses that will no longer be able to be met. This may include house payments, taxes, additional child care costs. Extra money may now be needed to pay for the expenses that the insured used to take care of.

Lastly, the cost of insurance for these particular kinds 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.

A big benefit 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 plan as either a whole life policy or a term contract (which typically will expire and be non-renewable after the age of 80). There is no physical, simply a few medical questions that have to be answered. Accordingly, these insurance contracts 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 are unhealthy before purchasing insurance coverage.

Just like any other line 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 premiums. If the cost of a $10,000 policy is close to the cost of $100,000 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 won't be able to qualify for the larger amount based on health status. The point, of course, is to compare alte
atives, 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 an agent face-to-face or online is important if you want to make the best decision.