The Basics of Final Expense Insurance
Final Expense insurance is designed to cover the bills that your loved ones will face after your death – think medical bills and funeral expenses. Final expense insurance is also known as burial insurance, since even bare-bones funerals cost thousands of dollars. A final expense life insurance policy isn’t the same as what’s popularly known as “insuring your life.” With term and permanent life insurance, the value of your policy is proportionate to your earning power now and for the rest of your life. With funeral insurance, the value of your policy is proportionate to the expense of your desired funeral. While other forms of life insurance can top a million dollars, it’s rare for final expense insurance policies to get above $20,000.
Do I need Final Expense Insurance?
That depends. If you already have term or whole life insurance, your loved ones can use your existing policy to pay final expenses. If you have term life insurance and you outlive the policy term,you may want to consider final expense insurance at that point.
Alternatively, if your family will have plenty of assets to work with when you die, you could use what’s called “self-insurance.” “Self-insurance” is one of those terms that sounds more complicated than it is. To self-insure is just to use your own money rather than use a life insurance payout.
Could your family self-insure for your final expenses? It’s a good idea to figure around $10,000 for the funeral expenses, but will you also want a catered party after the memorial service? A trip to a faraway land to scatter your ashes? Will you leave big bills behind? If you answered “yes” to any of those questions, consider springing for final expense insurance. And it’s probably best not to count on the lump sum death payment from Social Security to pick up the slack. It’s only $255.
Is Final Expense Insurance Expensive?
That depends on your age, and there’s no delicate way to say this. The older you are, the higher your premiums will be. That’s because the insurance company takes on more risk when insuring older folks, given the fact that they’re statistically closer to death. If you buy final expense insurance when you’re 45, you’ll pay less each month than if you wait until you’re 75.
Can’t I Just Pre-Pay For My Funeral?
You certainly can, and some people do. This approach has advantages and disadvantages. When you pre-pay for your funeral, you get to personalize it to your taste. You can grill different funeral directors until you find one you love. You can pick out the perfect casket and the choicest plot in the cemetery. Another advantage of pre-paying is that it will most likely prompt you to talk your choices over with loved ones, leaving them more confident that they know your wishes.
Different states have different guidelines governing funeral pre-payment. The government wants to protect people from writing checks to unscrupulous folks who will take the money and run, or charge your family extra on top of what you pre-pay. Before you pre-pay, check your state guidelines for how the money will be held until your death. Make sure you know what you’re paying for. Most importantly, are you locking in the rate for your funeral, or is there a chance your family would face an up-charge when the time comes? If you do any pre-planning or pre-payment, it’s important to tell a loved one what you did and where you keep the documentation.
The disadvantage of pre-payment is that it’s less flexible than burial insurance. Will you or your family be able to get a refund if your funeral plans change? Will you lose the money you pre-paid if you move to a different area? What happens if the funeral parlor goes out of business? With final expense insurance, your surviving relatives will receive a payout they can spend anywhere. If you go with final expense insurance instead of pre-payment, you have less control, but your family has more flexibility. The choice is yours.
If you want to leave a clear indication of your wishes without necessarily locking in the funeral home, you could always combine burial insurance with a document stating your preferences. Kept wherever you keep your will (you have a will, right?), this document would cover issues like burial vs. cremation, open vs. closed casket. etc.
The Bottom Line
Whether you choose a life insurance policy that covers funeral expenses and then some, a dedicated final expense insurance policy, or funeral pre-payment, you’ll be doing your loved ones a huge favor. Taking the time to consider and document your end-of-life wishes may be a little uncomfortable now, but it will make all the difference when the time comes.