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Final expense insurance: What you need to know

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Funeral and final expense insuranceFinal expense insurance pays for your funeral expenses, as well as any debts accumulated at the end of your life. That includes nursing home costs not covered by Medicare. 

Funerals are expensive and the price continues to rise. Even without a plot and headstone, the average funeral costs more than $8,000. That amount has risen more than 10 times since the 1960s. Most people don't want to leave this burden to their heirs.

Are there different types of policies?

Yes. You can purchase a whole life final expense insurance policy that covers you until your death. Or you can buy a cheaper term life insurance policy that only provides coverage until you reach the age specified in the policy. Final expense insurance policies offer varying amounts of coverage and premiums. (See “3 types of insurance to pay funeral expenses.”)

When should I buy it?

You can purchase a final expense insurance policy anytime between the ages of 45 and 85. Remember that the cost of the policy is lower when purchased at an earlier age since you will be paying into it over a longer period of time.

How much will it cost?

Even though premiums are usually lower because the amount of coverage isn't large, its critics still say that this type of insurance is expensive relative to what you get. They recommend exploring other types of insurance such as a traditional life policy if you want to have extra cash to cover funeral expenses.

That said, you can often find a final expense policy for as little as $10 a month depending on your age. 

I am bombarded by TV ads, so is this the only way to buy it?

No. Final expense insurance is also sold through the Internet, by phone or direct marketing.

Is it true that "You can't be turned down" as the TV ads state?

Yes. There is no medical exam required to purchase final expense insurance. So those who have a medical condition that would prevent them from buying regular term or whole life insurance may want to consider final expense insurance instead.

What if I die prematurely?

The death benefit for a final expense insurance policy is graded. If you die within the first few years of coverage due to a previously known condition like heart disease, your beneficiaries will not receive the full amount of the policy. However, they will usually get back what you paid in premiums, plus interest. But if your death is accidental, such as falling down a flight of stairs, most policies will pay the full benefit immediately.

Are there other options?

You could consult with a funeral director about pre-need alternatives. Or you could open up a special bank account solely for this purpose and include it in your will. Social Security provides a small death benefit, and armed forces veterans can seek help through the Veterans Administration.

What are the other end-of-life expenses?

In all probability, your children and or family will inherit other end-of-life expenses, such as the cost of probating a will, paying off a home mortgage if one exists or any expenses for your final care that were not covered by insurance.

What are the advantages?

  • Simplicity. You can quickly and easily buy a final expense insurance policy online or on the phone.
  • Guaranteed acceptance. There is no medical exam.
  • Inexpensive premiums. The younger you are, the cheaper the cost.

What are the disadvantages?

  • Price. Final expense insurance is more expensive than traditional policies considering the eventual pay out. 
  • Waiting period. There is usually a two-year waiting period before the policy takes effect.
  • Limited coverage. You have to make sure that a final expense insurance policy will actually cover all of your final expenses. Financial planners suggest you calculate the cost of your funeral arrangements, immediate bills and long-term obligations, and then subtract that sum from the amount already in your bank account. Your final expense insurance policy should make up the difference.

Final expense insurance can be a wise choice, but it depends on what you need from a policy. If you need a policy to help your spouse pay off a mortgage, a term life or permanent life policy, such as whole life, is likely a better choice.