How Does Final Expense Insurance Work?

Table of Contents

Your final expenses are any remaining costs that you would leave behind after passing. That might seem straightforward enough, but for many people, those final costs, when examined closely, often come as a shock when they find out just how high those costs can end up being.

Final expenses aren’t just any final bills. They can also other debts you owe, such as medical expenses and your funeral costs. If you don’t have a way to pay these costs before you die, the responsibility could fall to your family to handle.

This can often leave loved ones scramblings, taking money out of savings, applying for loans, and going into debt of their own. It’s understandable if that sounds overwhelming. After all, you can have a savings account to plan for these costs, but you can’t plan for expenses you don’t know about yet, can you?

You might be surprised to hear that, actually, you can. In fact, you should. Planning for your final expenses is an important way to protect your family in the event of your death.

You have a few choices when it comes to planning for your final expenses. Life insurance is a popular option, but not everyone can qualify or even need a standard life insurance policy.

Fortunately, there is a type of life insurance specifically designed to help prepare and cover these potential costs, and it’s called final expense life insurance. This type of policy won’t replace your income like a standard life insurance policy would, but it will cover your funeral cost, and other smaller expenses generally left after passing.

Pre-Need Insurance Vs. Final Expense Insurance

You can take a few different routes to make sure your family has the money for funeral costs and other final expenses when the time comes. The right route is the one that makes the most sense for your budget family and the type of funeral you want.

No matter which route you choose, having a plan is the best way to ensure your funeral cost won’t be a surprise burden on your loved ones. 

There are two popular ways of setting aside money for end of life expenses:

Pre-need insurance is actually another name for final expense insurance. It’s commonly used in prepaid funeral planning that is offered by funeral homes. You’ll generally work with a funeral director or an associate from the funeral home to discuss funeral and burial options to plan out the entire cost of services.

Depending on the funeral home you are likely to have several different options on how to handle payment arrangements. You may be offered the option to sign a contract and make either a one-time payment or payments over a period of time to pay for the cost.

Some funeral homes may also offer an option to pre-pay your funeral costs, with a pre-need insurance policy. A pre-need insurance policy is used as collateral payment rather than having to pay any actual money upfront.

This type of planning involves using a life insurance policy, commonly a final expense policy that has a death benefit equal to the total cost of what your funeral would be. If you were to pass away, the funeral home would receive the death benefit payment which should cover the entire cost.

Final expense insurance, when purchased on your own, gives you complete control over how you would like your death benefit to be used after your passing. When you have an individually owned final expense insurance plan the death benefit is paid to a beneficiary when you die. Your beneficiary is responsible for how they choose to use the death benefit.

The money received from the death benefit payout can be used at any funeral home to pay for any services associated with your final expenses. Since it’s not limited to just paying for funeral costs, it can be used to pay for other smaller expenses such as medical debts or any remaining financial debts. 

Regardless of the type of final expense planning your choose, your funeral costs will be covered either way, but there are some significant differences you should be aware of.

Keep reading to learn more detail about each insurance type. 

How Pre-Need Insurance / Pre-Paid Funeral Plans Work

Pre-need insurance or prepaid funeral plans are generally applied for with the funeral home you choose to work with if the option is available. 

You’ll select exactly what you want for your funeral, including your casket and all the details of your service. Depending on how the funeral home decides to set your policy up, they may require you to name them as the beneficiary or be collaterally assigned.

Collateral assignment means that you can name someone other than the funeral home as the policy’s beneficiary. If you pass, the funeral home is paid out the death benefit, and if there is any remaining money, it is paid to the beneficiary listed on the life insurance policy. 

Pre-need plans can be a good idea if you have a funeral home in mind you know you’d like to work with. They allow you to plan out every detail of your funeral and burial well in advance.

You’ll have the comfort of knowing your family will need to place a call to the funeral home your pre-need plan is with, and the rest will be taken care of.

However, there are some definite drawbacks to pre-need plans. These include:

Prices may change – Not all pre-need plans allow you to lock in prices. If yours doesn’t, the items you selected could be much more expensive by the time you die. If this happens, your plan won’t be enough to cover all of your expenses. 

Items might not be available – The items you selected also might no longer be available by the time you die, especially if you buy a pre-need plan well before your death. If items or services are no longer available, your family will need to do a lot of extra work and might end up having to pay higher costs. 

Funeral homes could mishandle the money – You’re putting your trust in a funeral home when you have a pre-need plan. This can work out well with a respected funeral home, but it’s important to be cautious. 

Your plans might change – You might be a pre-need plan but decide years down the road that you’d actually like different services or wish you’d selected a different funeral home. Unfortunately, you’ll be locked in with most pre-need plans.

You might move – If you’re living in another city, state, or country, when you die, it would be hard to use your pre-need plan since it’s tied to a specific funeral home. Shipping or transferring remains from another state could be very costly.

Interest can accrue with some plans – Normally, accruing interest is a good thing, but it might not be in this case. While the excess money can go to your family, they’d have to pay interest on it. If they need to use the extra funds to pay for changed prices, they could be stuck paying taxes on money that went right back to the funeral home.

That’s not to say pre-need insurance is never a good idea. If you’re sure you know the funeral home you’d like to work with, they can be a good way to ensure your funeral is planned down to the last detail. Plus, some pre-need plans have price guarantees and allow you to break your contract if you move, or your plans change.

If you’re interested in a pre-need plan, it’s a good idea to know all of these details beforehand. Don’t be afraid to ask the funeral home what happens if you move, if an item you want is no longer available, or if prices go up.

It’s also a smart idea to have a lawyer look over any pre-need insurance plan contract before you sign it. That way, you’ll know you’re still covered if costs or plans change.

How Final Expense Insurance Works

Pre-need insurance plans aren’t for everyone. If a pre-need plan seems too risky and restrictive, consider buying your own individual-owned final expense life insurance policy. Final expense insurance isn’t tied to a specific funeral home and is offered by many insurance companies.

Instead, the money will go to the beneficiary of your choosing. They can then use the funds to pay for the funeral at any funeral home, and if the policy has leftover funds, it can also pay for any remaining expenses.

Instead of pre-planning with a funeral home, you can pre-plan any end of life expenses with your family and a lawyer if needed. You can choose everything you’d like your funeral to include and write it out in a will.

Every detail to how you want any other expenses handled with the funds from the life insurance policy can be recorded so that your beneficiary will have the funds and instructions on how to carry out your final wishes.

A final expense policy works a lot like a standard life insurance policy. You’ll pay a premium each month, and your beneficiary will receive the funds if you die. However, you won’t need to take a medical exam to get covered. 

There are some other significant advantages to final expense insurance. These include:

Permanent life insurance – Final expense insurance policies are whole life insurance policies. These plans will last your entire lifetime and offer a premium payment that will never increase.

Up to $50,000 in coverage – You can set an amount that goes beyond the anticipated cost of your funeral. This can allow your family to pay for other expenses, like your final medical bills or legal fees. Final expense insurance policies are often capped to a maximum benefit amount of up to $50,000. 

Simplified non-medical underwriting – Applying for a final expense policy will not require you to take a medical exam. These plans are designed for older applicants who are often in their senior years.

You don’t have to be in excellent health to qualify – Because these plans are designed for the elderly, they understand that not everyone that applies will be in excellent health. Approval for coverage will be based on medical questions, determining the type of plan you will qualify for.

Your family has flexibility – Your family can spend the money from your policy on your last wishes, but they won’t be locked into a certain funeral home or other providers.

Coverage might be affordable than a pre-paid funeral plan – Compared to making payments directly to a funeral home towards the cost of your funeral plan, purchasing a final expense policy may be a cheaper option. It could leave your family with not only the funds needed to pay for the funeral expenses but also leave leftover money to pay for other expenses.

The death benefit money is tax-free – There are no taxes on final expense insurance payouts, so your family won’t have any surprise fees.

Types of Final Expense Insurance

There are three different types of final expense insurance, which determine how the death benefit will be paid should death occur within the first two “sometime three” years of having the coverage.

The basic idea is the same for all three. You’ll purchase a pre-set amount of coverage and pay premium payments in return for a death benefit payout that will go to your beneficiary but the first two years will determine how much of the death benefit would be paid out.

The type of final expense plan that you will qualify for depends greatly on your health history. While you will not be required to take a medical exam, you will need to answer medical questions on the application.

Your responses to the medical questions, along with a few background checks commonly used when underwriting life insurance, will determine the type of final expense plan you will qualify for.

The three final expense life insurance options and who the death benefit payout would occur is as followed:

Level death benefit

A level death benefit plan is the most affordable of the three final expense plans. There is no wait on the death benefit should death occur within the first two policy years or any time after.

To qualify for the level death benefit plan, you will generally need to be in good to excellent health.

Modified death benefit

A modified death benefit plan will often be given to an applicant with a health history that poses some risk to the insurer of having to pay a potential death claim.

To offset that risk, the insurance company will often charge a rate that would be higher than someone that would qualify for a level death benefit plan. In addition to paying a higher rate, the full death benefit will be limited to a specific percentage of the full amount during the first two or three years, depending on the insurance company. 

For example, let’s say you purchased a final expense life insurance policy with a death benefit amount of $10,000. Your application shows that you have had a health history of some heart issues. The insurance company denies a level death benefit plan but offers a modified death benefit plan.

A modified death benefit plan would typically work as followed:

  • Policy Year 1: Death benefit equal to 40% of the full amount
  • Policy Year 2: Death benefit equal to 75% of the full amount
  • Policy Year 3: Death benefit equal to 100% of the full amount

After policy year three there would be no restrictions on the death benefit payout.

Two-year graded death benefit

The term modified death benefit and graded death benefit are often used interchangeably. Many final expense life insurance companies do not offer a modified death benefit option but a graded death benefit instead. 

Rather than paying out a percentage of the death benefit during the first two policy years, the graded death benefit would pay a refund of 100% of all premiums plus an interest rate on the money that had already been paid to the insurance company. 

The graded death benefit option would work similarly to how a modified death benefit would pay.

  • Policy Year 1: Death benefit equal to 100% of all premiums returned plus 10% interest
  • Policy Year 2: Death benefit equal to 100% of all premiums returned plus 10% interest
  • Policy Year 3: Death benefit equal to 100% of the full amount

After policy year three the policy the death benefit would be equal to the full death benefit.

Guaranteed Issue

Guaranteed issue is a type of life insurance that falls within the category of final expense insurance. The greatest benefit that guaranteed issue life insurance can offer is that you cannot be denied coverage as long as you are within the age guidelines, generally ages 50-85.

Even if you have a history of high-risk medical conditions or currently have a medical condition, you cannot be denied. Because these plans are underwritten as the same as simplified underwriting, you will not be required to take a medical exam or be asked any health questions about your health.

However, with guaranteed issue life insurance, there are some negatives. You’ll pay a much higher premium than any of the other coverage options. The maximum amount of death benefit coverage is limited to $25,000. 

The death benefit payout is also graded for the first two years. If death were to occur before the end of policy year two, the payout is equal to a return of all premiums and generally 10% interest on any paid premiums.

After policy year two, the full death benefit is payable with a guaranteed issue policy.

Cost of Final Expense Insurance

The cost of final expense insurance policies depends on a couple of different factors, which include:

  • The insurance company choose to apply with
  • Your age at the time of the application
  • The amount of coverage you applying for
  • The type of death benefit you qualify for level, graded, or guaranteed

Keep in mind that the level death benefit option will offer the lowest rates for coverage, and the death benefit will be paid immediately without there being a two-year wait.

Graded or modified plans are a great option for those with a medical history the insurers would consider high risk. The premiums will be a bit higher than the level benefit plan, and during the first two policy years, there will be a wait before the full death benefit will payout.

Guaranteed issue plans will be the highest cost and will also have a two-year wait before the full death benefit is payable, but you cannot be denied coverage regardless of your past or current medical history.

To provide you with an idea of how much a final expense life insurance policy would cost, we have put together the below table representing the actual cost of a $10,000 final expense life insurance policy at all available death benefit types (level, graded, or modified and guaranteed issue).

Cost of a $10,000 Final Expense Insurance Policy

MaleLevelModified/GradedGuaranteed
Age 50$30.68$39.78$44.09
Age 55$35.95$46.89$57.93
Age 60$43.76$53.98$63.89
Age 65$54.81$64.77$85.16
Age 70$70.66$83.86$99.18
Age 75$99.94$108.86$139.52
Age 80$139.73$143.04$206.33
Age 85$192.74$237.51$233.16
FemaleLevelModified/GradedGuaranteed
Age 50$24.31$28.89$34.47
Age 55$27.71$35.98$44.27
Age 60$32.87$44.48$51.06
Age 65$41.01$52.48$62.61
Age 70$51.92$68.08$75.53
Age 75$72.41$89.61$108.17
Age 80$98.43$117.88$167.00
Age 85$119.50$179.22$221.00

*Male/Female monthly sample rates for a $10,000 final expense life insurance policy. Premium rates current as 01/14/2021

How Much Final Expense Insurance Do You Need?

Unlike a traditional life insurance policy such as term life insurance, final expense insurance isn’t meant to replace your income. It’s only meant to cover the expenses associated with the end of your life.

However, that doesn’t mean it can’t be used to cover your family’s needs, too. It’s a good idea to calculate both the cost of your funeral and any other costs your family might have in the months surrounding your death. So, you could set aside money to help your family pay their bills for the months right after your death. You can also factor in medical costs.

Let’s look at an example. You shop around for funeral costs in your area and determine the funeral you want would cost around $10,000. Looking at your monthly expenses, you determine that your family would have around $5,000 in bills and other costs in the two months after your death. You also have a Medicare Advantage plan with an out-of-pocket maximum of $5,000. Added together, that means a $20,000 final expense policy might be a great fit for your situation.

Final Medical Costs

Unfortunately, calculating final medical expenses is incredibly difficult. Medical expenses are one of the top causes of debts in the United States. Plus, unlike a casket you can pick beforehand, you can’t tell in advance how much time you’ll need to spend in the hospital, what treatments you’ll need, or if you’ll need specialized care. 

One way to get a rough idea is to look at your insurance. Many insurance plans list a maximum out of pocket cost you can pay in a year. Once you hit this maximum, the insurance company needs to pay all of your expenses. However, that cost is only for a set year, not a lifetime maximum.

So, if you’re sick for more than a year, your maximum out of pocket costs will double. Plus, many insurance plans won’t pay for out-of-network ever, even if you’ve hit your maximum.

For those reasons, you should use your plan’s maximum out-of-pocket costs to get an idea of the minimum amount you should include when planning your final expenses.

Funeral Costs

The single biggest expense in your end of life expenses if often your funeral. Average funeral costs are on the rise.

Funerals in 2021 can cost an average of over $7,000, and costs are predicted to keep rising over the years. Plus, even today’s costs can skyrocket when you add costs for more expensive caskets, floral arrangements, ceremonies, and more.

People often find themselves dipping into personal or retirement savings to pay for a loved one’s funeral. That can add a lot of extra stress to family members who are already dealing with the grief of a loved one’s recent death. 

The largest cost associated with funerals is generally caskets. Casket prices depend on the material used and the craftsmanship. Options can range from a simple wooden casket to an expensive metal casket.

You can select a casket ahead of time from your funeral home or shop around outside of what the funeral home offers. As a word of advice, we recommend browsing caskets online to get an idea of what’s available and the costs of the different types of caskets that are available. 

In addition to caskets, common funeral costs include:

  • Obituaries
  • Burial containers
  • Vaults
  • Preparation of the body, including enabling or cremation
  • Funeral home service fees
  • Transportation of the body
  • Use of the funeral home for a viewing
  • Programs for viewings or ceremonies
  • Floral arrangements
  • Use of the facility for a ceremony
  • Musicians, officiants, and funeral home staff at a ceremony
  • Musicians, officiants, and staff for graveside services
  • Use of a hearse or other vehicles
  • Graveside or masulam service fees
  • Burial plot if not pre-bought 
  • Monument, markers, or gravestones

Your costs will depend on which of these things you choose to have and the services you select. For example, a full-service funeral with a bronze casket will cost a lot more than cremation and simple church service.

Still, these expenses are something to be aware of. You can pay for some of these expenses, like a burial plot, gravestone, or even a casket individually and without having to purchase a pre-need plan from the funeral home.

It’s normal not to dwell on your own future funeral, but it’s an important part of financial planning. Deciding what items and services you want to know can help you plan. When you have a plan, you can set aside the right amount of money.

Final Expense Insurance Vs. Term Life Insurance

Final expense insurance is generally aimed at older people or those in declining health. If you’re young, healthy, and have a spouse and young children, you might be better off buying a term life insurance policy.

Term life policies cover you for a set amount of time, generally between 10 and 30 years. These policies normally require a medical exam, although not always. Your rates will depend on your health and your overall risk of death. That means you can often get a policy for a very affordable rate if you’re in good health. 

Term life policies allow you to pay your final expenses and cover your family for years to come. You can get policies worth over a million dollars. In many cases, your policy will cost the same or less than a final expense insurance would. That means you can get a lot more coverage without paying a lot more. 

However, not everyone can qualify for term policies. If you can’t qualify for a term policy due to health conditions, age, or other factors, final expense insurance can be a great way to help your family in the event of your death.

Another upside?

Final expense insurance doesn’t have an end date like term insurance. You can’t outlive a final expense policy how you can with a term life policy because final expense insurance is permanent whole life insurance coverage.

So what’s best? It depends on you. If you’re 35 and healthy, a term plan is a smart idea. However, if you’re 65 and over and have a few health conditions, a final expense insurance policy might be a better bet.

Questions about Final Expense Insurance?

If you’ve still got questions, read on. We’ve answered some common questions below.

Why can't I use the money in my savings account?

It can seem a lot simpler to just use a savings account for any potential end of life expenses. However, the money in a savings account isn’t guaranteed to be there when it comes time for your final expenses.

An unexpected money emergency or medical emergency can wipe your savings out completely. Conversely, final expense insurance will be there to help your family pay for your funeral other final costs.

What if I have money set aside in my will for my final expenses?

You can set money aside in your will, but it’s often not a good idea. That’s because the money in your will won’t be available immediately. It can take months for the money from your will to payout.

That means that while your family might eventually be reimbursed for your funeral costs, they’ll need to come up with the money upfront. This can still place a serious burden on your family. Money from a final expense policy, however, will be available much faster.

What if I'm a veteran and eligible for a free burial?

Veterans qualify for free burial in a national cemetery. However, the allowance does not cover all of the funeral costs.

According to the U.S. Department of Veterans Affairs, VA burial allowance amounts, the following benefits are available to veterans who have passed away (non-service-related).

  • Burial and funeral expenses: $300 – If a death has occurred in VA hospital $807
  • Plot-interment allowance: $807 – If not buried in a national cemetery

So, it’s still a good idea to have a final expense insurance place to pick up any costs that are not paid by the VA.

Is there a waiting period for final expense insurance?

It depends on the death benefit plan you qualify for.

Final expense insurance is favorable to many high-risk health conditions. In return, the insurance company needs to offset the risk in paying out a full death benefit claim immediately after issuing the policy due to a sudden death related to health.

If you’re healthy, your coverage will pay immediately without any wait. If you have a history of medical conditions, your policy may have a two-year wait during the first two policy years before the full death benefit will be eligible to be paid in full.

Do I need to select a person as my beneficiary?

No. While most people select a trusted loved one as a beneficiary, you are not required to do so. You can select a funeral home as the beneficiary, but we don’t recommend this. If you want to pay for your funeral with a life insurance policy, a better way is to collaterally assign the policy and still name a loved one as the primary beneficiary.

By doing this, the funeral home is paid only the balance of your funeral cost, and your beneficiary is paid any remaining balance left from the death benefit.

Are a pre-paid funeral plan and pre-need funeral trust the same thing?

Not exactly. While both are plans that pay for your funeral at a specific funeral home, there is a difference.

A pre-paid funeral plan allows you to pay in installments for services at a specific funeral home. The money is held by the funeral home until your death.

A trust, however, is not held by the funeral home. It’s set up with a bank or financial institution. The funeral home will get it when you die, but they won’t manage it.

Final Expense Insurance - Final Thoughts

Final expense insurance coverage is a great choice for people who aren’t able to qualify for standard life insurance or don’t require a large amount of coverage. It can help you leave your family the money they need to cover your funeral and other last expenses.

However, it might be easier to get term life coverage than you think. No exam policies can help you get term life coverage without the stress of an exam.

At No Medical Exam Quotes, we can show you rates from the best no exam companies. You can use our simple form to see a no-obligation quote. You might be able to get a great term policy at a great rate. Let us help you get started today.

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Jeffrey Manola - Life Insurance Expert

Jeffrey Manola - Life Insurance Expert

Jeffrey Manola is the founder of No Medical Exam Quotes, an online insurance broker with a strong focus on helping people shop for the perfect life insurance policy. Jeffrey is both a licensed life insurance expert and content creator for the website. Before becoming a licensed life insurance agent, he served in the United States Marine Corps. He transitioned from serving his country to helping families find affordable life insurance coverage since 2009. No Medical Exam Quotes is licensed to offer life insurance coverage in all 50 U.S. States.

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