Types of Final Expense Insurance

Though many of us make plans for various stages of our lives—we save for a wedding, we set aside investments for our children's education, we contribute regularly to retirement accounts—funding for end-of-life details often goes neglected.

That's not hard to understand. After all, it can be fun to think about traveling around after retirement years, but it’s difficult to consider what happens to our family when we’re gone.

Final expense insurance is one way to protect your loved ones against the financial concerns of funeral planning.

Known by many other names—burial insurance, pre-need insurance or funeral insurance—final expense insurance is a type of permanent life insurance that collects a regular premium in exchange for a fixed amount of coverage paid to a named beneficiary or beneficiaries at the time of your death. That money is intended to be used to cover the cost of medical care and other end-of-life expenses, most often funeral costs.

Though it’s common to assume life insurance will cover these expenses, that’s not always the case. If you want a way to guarantee coverage for your funeral arrangements, and leave your family to sort out the details of your final disposition and funeral service, final expense insurance may help. But if you want to relieve your loved ones of both financial and emotional burdens associated with your passing, prepaid funeral plans are the way to go.

This article will help to answer:

• What's the difference between a prepaid funeral plan and funeral insurance?
• Can I get a payable on death account for funeral expenses?
• How does life insurance pay for funeral costs?
• What is a final expense life insurance policy?
• What are the types of final expense insurance?
• What's the difference between a guaranteed issue and a simplified issue life insurance policy?

What’s the difference between a prepaid funeral plan and funeral insurance?

When you plan and prepay for your funeral, you outline your wishes. You meet with a funeral planning professional and walk through the details, from choosing your disposition (burial or a cremation), type of service (like a chapel service or an outdoor celebration of life), flowers, mementos, and more. You can get as specific as you'd like—right down to your clothes, the music and the menu.

Funeral (or final expense) insurance, on the other hand, doesn’t include a plan. It’s simply a way to fund a funeral, cremation, memorial and more.

When you want the comfort of knowing that your family won’t have to make arrangement decisions in the difficult days immediately following your death—and you want to ensure that your final wishes are honored—a prepaid funeral plan is for you.

On the other hand, final expense insurance does not pay for the specifics of the funeral itself, but rather it is used to cover funeral costs. If your main goal is to ensure that expenses for a funeral or cremation are covered, then funeral insurance can be a good choice. But unlike a prepaid funeral plan, there's no guarantee that they amount you pay will cover the costs of your funeral.

Learn about prepaid cremation options.

Can I get a payable on death account for funeral expenses?

A payable on death account, or POD, is an account that you establish with your bank. The person you name as the beneficiary can access funds in the account after after your death without having to wait for your will to be probated. The beneficiary can then use the funds to pay for your funeral expenses.

There is, however, a downside. In order for your beneficiary to access the POD account, he or she will need to provide the bank with a death certificate, which can take up to a month to receive. Since most funeral homes require payment for services at the time of the funeral or cremation, the beneficiary ends up paying for funeral expenses out of pocket and then reimbursing himself or herself once funds from the POD account are released.

It’s definitely a good idea to name a beneficiary for all your bank accounts, but if your goal is to have funeral expenses covered at the time of need, funeral insurance or a prepaid funeral plan is a better option.

It’s common to assume your family will use your life insurance benefits to pay for your funeral costs—and they might. But those benefits are meant to replace lost income and help your family pay off debt—so they may or may not be used for your funeral—and there can be other complications, too.

First, it can take weeks or even months for a life insurance company to pay out a claim, and the funeral home will require payment at the time of the funeral. This may be surprising, frustrating and financially burdensome for your loved ones during an already difficult time. Learn more about paying for a funeral in installments.

What's more, even if your family opts to pay the expenses at the time of need and reimburse themselves, the policy may not pay out enough to cover all of the funeral or cremation costs. Your family may still incur unexpected out-of-pocket expenses.

Learn why prepaid funeral plans are the best gift you can give your children.

A final expense life insurance policy is life insurance that specifically directs the beneficiary to use the pay out to cover medical costs and other end-of-life expenses, including funeral, cremation or cemetery costs. The beneficiary decides how the money is spent.

Unlike traditional life insurance policies, which require a medical exam to help set the cost of your policy, final expense insurance policies don’t require an exam, and applicants are often insured after answering only a few questions.

Once a final expense insurance policy is in effect, as long as premiums are kept up to date, it remains in effect until your death, when your beneficiary will receive the benefit.

There are three categories to consider when purchasing a funeral insurance plan:

• term or whole life
• medically underwritten or guaranteed issue
• guaranteed or nonguaranteed expense lock

Term funeral insurance. May be less expensive than other types, but it has a limited time for which a benefit will be paid and for which the premium payment will remain unchanged. Term choices usually include 10 or 20 years. If the insurance has not been used and a benefit has not been paid during that time, you may have an option to renew it, but often at a higher premium rate. This type of policy does not protect against rising funeral costs.

Whole life funeral insurance. Sometimes called permanent insurance, this has a higher premium because the benefit does not expire in a certain time frame. In other words, a term plan might pay out a claim; a whole plan will pay out a claim. These plans remain in force until the time of death, at which point the benefit is paid in full to the designated beneficiary (funeral home or individual).

Medically underwritten policy. If you are in good health or have only minor health issues, you could consider a medically underwritten policy. There is usually a detailed medical history associated with these policies, but they offer the opportunity for a higher maximum benefit.

Guaranteed issue policy. If you have high-risk health problems but not a terminal illness, this type of policy could be for you. It is more expensive than a medically underwritten police or even a simplified issue life insurance (see below) and offers lower maximum coverage amounts, but it's an option.

Guaranteed expense lock. This policy type locks in prices for funeral goods and services selected in advance. Once the policy is paid, there are no surprises and no additional charges or expenses. If purchased through a Dignity Memorial® provider, whole life, guarantee issue and medically underwritten policies fall under this category. 

Nonguaranteed expense lock. This policy type does not lock in prices for goods and services. If costs increase and become greater than the policy’s death benefit, your family will need to pay the difference.

A policy may have a combination of these components.

If you're confused, you're not alone. Contact us and a pre-planning advisor will reach out to answer all your questions. 

For some people, a medical exam is a great obstacle to obtaining whole life insurance. However, there are two types of whole life insurance polices that do not require a medical exam.

• Guaranteed issue life insurance policies ask applicants just a few questions to rule out terminal illnesses, but they otherwise cover individuals with major health problems.
• Simplified issue life insurance policies are for those who may not qualify for a fully underwritten life insurance policy but are considered only moderate health risks. Applicants answer detailed medical questionnaires but do not need medical exams to qualify.