 Personal Finance PowerPoint Presentation Final Expense Insurance Prepare to get financially fit by practicing personal finance. Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place like set the goals, develop a plan to reach them, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia. Final Expense Insurance, which you can find online. Take a look at the references, resources, continue your research from there. This by Amy Fontanier updated August 30th, 2020 in prior presentations. We talked about insurance in general, moving on to the life insurance, keeping in mind the two major categories of life insurance, that being the term insurance or the pure insurance, the one that we always want to be comparing to and then the permanent insurance. Keeping that in mind, we're now looking at what is final expense insurance then? How does that fit into the picture? Well, final expense insurance is a whole life insurance policy which falls into the permanent insurance type of things as opposed to the term insurance type of thing that has a small death benefit and is easier to get approved for. Final expense insurance is called, quote, funeral insurance, or quote, burial insurance or simplified issue whole life insurance or modified whole life insurance goes by many names here. So all our marketing terms that the insurance industry uses to sell small whole life policies with a face value death benefit of $2,000 to $50,000 to deal with most likely the death expenses of my modest funeral, my modest $50,000 funeral. There is no difference between final expense insurance and normal life insurance other than the fact that the insurers sell smaller policies to make it more affordable says Richard P. Sabo, a financial planner and insurance fraud expert in Gipsonia, Pennsylvania. So he's basically saying that the other insurance is similar. If you have standard insurance, it's a similar type of setup. It's just that basically these types of insurances are sold at the smaller kind of chunks possibly for marketing purposes or for specific needs. So final expense insurance has a death benefit designed to cover expenses such as a funeral or memorial servicing, service embalming and casket or cremation. So obviously the goal here would be saying if you're going to die, you're gonna say, well, I don't want to basically leave the people that are gonna be taking care of the funeral costs with the bill on that. So possibly have some insurance related to that. Although you might just have normal insurance, which of course they could use normal life insurance, which they might be able to use in part for that purpose as well. So however, the beneficiaries can use the death benefit for any purpose from paying property taxes to taking a vacation. Hey, I gave you that $50,000 life insurance policy for my funeral expenses, whatever, if you're gonna go on vacation, put me in a coffee can, burn me up and put me in a coffee can, go on vacation, whatever. So quote, they market the funeral expense insurance to people who are older and starting to think about their funeral costs and they make it look like they need to do it in order to take care of their families, end quote, says Sabo. So it's kind of sad that they might market basically a product which maybe someone doesn't really need because they might already have life insurance, but basically as a way to say you need to take care of kind of your family. So they're kind of playing on people's sympathies at that point in time to sell possibly something that may not be necessary if they're already covered by like normal kind of life insurance. So quote, some people already own existing life insurance policies that can go towards paying final expenses. So do they really need a new policy, end quote. Another situation where funeral expense insurance may be redundant is if someone has already prepaid their funeral expenses, he said. So in other words, if you've already kind of set up your funeral plans and prepaid them, then setting up the insurance along with it is kind of redundant. But you can see whenever there's just death involved, obviously you get the situation where you can kind of play on people's emotions and the guilt and whatnot of leaving people with a situation of handling debt and so on. So basically you wanna make sure that you're looking clearly at these kind of situations to see if you're actually covered in what your actual goals are and what tools you need to deal with them. And once again, you probably want to be talking to somebody, not just the insurance broker who's gonna be making a commission on whatever policy but possibly to say a third party like a financial planner or a CPA firm or a lawyer or something like that that you're paying just for their advice maybe. And then take that as a tool to then talk to the people that actually make money from you purchasing financial stuff like insurance for example. So how does final expense insurance work? Let's say you're retired, no longer have life insurance through your employer and don't have an individual life insurance policy. So you might have had life insurance through your employer that was only there during the time that you are working. So you don't have that at this point in time and you don't have an individual insurance policy. You also don't have a comfortable nest egg and are worried about the financial burden you'll leave on your spouse and or kids when you die. You contact a life insurance agent and start the application process which includes answering a few basic questions about your health. The death benefit is great but the premiums are not affordable because of your age and health. So clearly you're beyond the age of normally getting life insurance or getting a good rate on the life insurance because usually you're buying the life insurance in the middle of your life when you might have more debt and whatnot but it's less likely that you're going to die at that point in time, right? So unfortunately they don't issue policies with a death benefits that's small enough to make the insurance premiums fit your budget. At this point you might give up and assume you can't afford life insurance. Final expense life insurance is designed to solve this problem. The insurance companies build these policies to absorb the risk of some serious medical issues. End quote says Anthony Martin, CEO of Choice Mutual a financial expense life insurance brokerage company. Quote, this means that most seniors despite poor health can still secure a policy. So obviously one of the issues of getting a policy at that point later in life is that you might have health conditions and so on at that point in time. So there might be specific conditions then where the insurance tool is specialized for that particular situation. So smaller death benefits, the smaller death benefit of funeral expense insurance makes the premiums more affordable as Savo notes above and the policy is permanent. So no matter when you die, your heirs will get the death benefits you want them to have as long as you've paid your premiums. So it may not cover everything such as paying off a large mortgage but final expense insurance will at least help your loved ones pay the bills. Bills directly related to your death bills they'll have a harder time paying without your income or anything else. However, if your family has other ways to pay your funeral, your final expenses you should think twice before buying a policy. So in other words, you would think that the policy might be designed for people in specific situations because obviously normal life insurance is often there for when you're in the middle of your life, possibly having more mortgages and whatnot and people that are growing up that are reliant upon you. And then at the later point in your life, you would expect then that you possibly paid off the mortgage, possibly you have less debt and possibly you have net assets. You have more assets than liabilities at that point in time. And if that's the case, then of course if you die then they could take, they could pay off with whatever assets or whatever arrangements you've actually set up given you have the money to set that up without the need for the insurance. So that might be one case. The other case might be that you have normal insurance already that's life insurance that covers any kind of expenses that you might need and therefore not need any other insurance, a redundant sort of insurance at that point which might be more expensive or not really necessary given the fact that you're gonna have to qualify for it at a point in your life when you're less likely to get a good rate for the amount of benefit that you're going to have. But if you don't have any of that stuff then there's no other way to get life insurance and you don't have the net assets to cover the funeral expenses or arrange the funeral expenses yourself. You would think that might be a niche kind of area where it could be appropriate. So the table below highlights the pros and cons of final expense insurance. It also shows how the moniker is just a marking term. So the pros, policies are available to applicants with poor health. So that could be useful. The application process doesn't include a medical exam which could be good, only a questionnaire and prescription history at most. On many policy premiums never increase. This is true for many types of life insurance. So the insurer cannot decrease your policy's death benefit unless you borrow against the policy's cash value or request accelerated death benefits. Also true for other types of life insurance. Your errors can use the death benefit for any purpose. Again, a standard feature of life insurance. The death benefit is guaranteed as long as premiums are paid and you don't have a term policy, also a standard feature of any whole life insurance. The death benefit is not taxable, also a standard feature of life insurance. You can buy a policy with a death benefit of $50,000 or less and that's all some people need or can't afford. So what are the cons then? Some insurers put confusing or misleading information in their marking materials. So this is also true for other types of life insurance. So they might be saying, they might try to sell added insurance to people that aren't in that kind of niche situation and possibly plan people's emotions in that way which wouldn't be good using marketing tools. Some insurers provide incomplete information about these policies and their marketing materials. Also true for other types of life insurance because the policies have relatively low death benefits, you could lose money if you live a long time and pay more in premiums than your beneficiaries will receive in death benefits. So clearly if you buy some, the death benefits that have a fairly low payout at the point of death, then obviously you might be paying in more money in premiums than you would get from the death benefits. You also lose money when you pay term premiums and don't die while the policy is enforced. Some people let their policies lapse which means their heirs won't receive the death benefits. So obviously if you stop paying the premiums, then you're not gonna get the benefit when you die. That's also true of other types of insurance. Some final expense insurers use marketing scare tactics based on high average funeral cost and plays a senior's fear of burdening their loved ones. So that would be the most kind of distasteful kind of thing that you could see obviously happening, people playing on their emotions and whatnot at that point at the point of death and whatnot. So you wanna make sure that you're thinking clearly about it when you make these kinds of decisions. Some insurers steer consumers without major health problems toward more restrictive and expensive policies even though they can qualify for better coverage. So clearly if you don't need that kind of insurance, if you can get other kind of normal life insurance coverage and that might be suitable. So it might be kind of coverage that you would need under particular situations and circumstances. Understanding final expense insurance, as with any type of life insurance, the premiums for final expense insurance depend on your age and health. Where allowed by state law, they may also depend on gender. So you would think gender, why is gender a factor? Because typically women might live longer and so therefore from a statistical kind of calculation you would wanna take that into consideration for the risk factors and so on. So the older and less healthy you are, the higher your rates will be for a given amount of insurance. Men tend to pay higher rates than women because of their shorter average life expectancy. Well that's not fair, I don't wanna pay more but it's just the calculations of the numbers. What if I say I'm a woman, so that's not good. Anyway, and depending on the insurer, you may qualify for a lower rate if you do not use tobacco. So it's always got that tobacco component in there. Some insurance companies issue final expense policies to people from birth to age 85. However, depending on the policy and the insurer, there may be a minimum age such as 45, a maximum age such as 85 at which you can apply. The largest death benefit you can select may be smaller the older you are obviously because you can imagine the death benefit that would be paid out by the insurance company might be smaller as you get older because you're more likely to die sooner. Policies might go up to $50,000 as long as you're younger than 55 but only go up to $25,000 once you turn 76. Some insurers offer the same maximum death benefit to all applicants regardless of age. As mentioned earlier, final expense insurance is a type of whole life insurance. Whole life policies are pretty easy to understand as far as permanent life insurance goes. Once you have your policy, the premiums cannot increase, the death benefit cannot decrease. Unlike a term policy, a whole life policy does not expire when you reach a certain age. So it just continues on which is obviously the point for a death policy to pay final expenses. A whole life policy also accumulates cash value that you can borrow against through any loans that are unpaid when you die will reduce how much money your beneficiaries receive. So when you apply for the final expense insurance, you will not have to deal with a medical exam or let the insurance company access your medical records which can make things easier. However, you will have to answer some health questions. So I hate when they ask me those self, gotta answer self whatever. Because of the health questions, not everyone will qualify for a policy with covers that begins on day one. Guaranteed issue, a special type of final expense insurance. Applicants with serious health issues will only qualify for a policy that does not require medical questions and exam or medical records. We talked about this a bit more in a prior presentation. So if you're in that particular situation, they can't get any insurance that basically would have the exams which might be a more expansive, meaning normal insurance might be a little bit more expansive even if you have conditions. So you might wanna look into that before but then you could go to the guaranteed issue. So these guaranteed issue policies always have a two to three year waiting period before benefits will be paid. So on those kind of policies, if they're not gonna give you an exam or something like that, then there's gonna have this waiting period that you've gotta live out that waiting period in order for the insurance to kind of kick in. So if the insured dies during the waiting period, the beneficiaries will not receive the policy's death benefit, they will however, receive a return on the premiums the policy holder paid plus interest usually at an annual rate of 10%. For more on guaranteed issued policies including how life insurance companies can afford to offer them, read our piece on guaranteed issued life insurance. So Investopedia has that, we talked about that in a prior presentation. Real life example of final expense insurance. Let's check out the example. Using Choice Mutual's online quote tool, we found that for a 68 year old man, this being Investopedia in California, a $25,000 final expense insurance policy with health questions and immediate coverage might cost $156 to $180 per month while one without questions, a guaranteed issue policy with a waiting period might cost $234 to $345 per month. Obviously more risk being taken on if they're not gonna be going through the exam process and that kind of stuff. Let's say that the man has congestive heart failure and only qualifies for a guaranteed issue policy with a two year waiting period. So now they're not gonna, he can't qualify otherwise because he's got this serious health condition so he has to do the one, the more expensive one that has the waiting period. So he's gotta live, you gotta make it through that two years, make it through the two years. If he buys the most expensive policy with a $345 monthly premium, after two years, he will have paid $8,280 in premiums. So two years of paying those premiums, $8,280. His beneficiaries will come out ahead if he dies between the first day of year three when the waiting period ends and the end of year six when the premium paid will be about equal to the death benefit. So then you gotta work out, he's gotta make it past the two years and then the death benefits minus the amount of premiums he paid in would be kind of the gain on that scenario, that kind of morbid scenario. So people who are healthy should not buy from a company that only sells guaranteed issue policies because they will pay an unnecessarily high price and coverage will not start on day one. So obviously if you're relatively healthy, you'd like to buy normal insurance through the whole medical questionnaire and exam if necessary, even if you have issues that might still be cheaper than buying a policy that doesn't have that stuff because the insurance company will take on more risk and therefore charge higher premiums. So they may not even want to buy a final expense policy according to Sabo. The caveat is that they have to be healthy enough to qualify. Sabo says that a 68 year old non-smoking male in California could get a $25,000 guaranteed universal life policy for about $88 per month. That's much better. This policy would expire at age 100 so it does provide less coverage than a whole life policy. So if you live past 100, then it's gonna be an issue, but that might be the case. I'm going to that 121 line. So you'll want to take your own health and budget into account when deciding whether a trade-off like this is worth it. Guaranteed universal life like whole life does not expire as long as you buy a policy that covers the rest of your life. You can buy a policy that will cover you to age 121. There it is. I'm gonna live to 122 though. What about, that's the maximum protection or age 100 or to a younger age if you're trying to save money and don't need coverage after say age 90. It costs less than final expense insurance because it doesn't have a cash value component. So again, the term insurance, the pure insurance is often what you want to be comparing everything to because that's the cheaper kind of policy that doesn't have all this other kind of stuff that is going into it, although you have to designate the term that will be covered. When regular life insurance is better. So quote, if you can afford to buy a larger policy to meet the company minimum death benefits, then you are better off buying regular life insurance. So under those conditions, if you can afford it then the regular life might be the way to go. So Sabo Martin agrees. He says that the most insurance carriers require a minimum face value of $50,000 to $100,000 on traditional whole life or term insurance. So the higher face amounts will lead to higher premiums than some people can afford, even though the cost per $1,000 of coverage is less than that of a final expense policy. He said that many of his clients who could easily qualify for a traditional whole or term policy choose final expense because they only want $20,000 or $30,000 of coverage and claims on these policies are often paid faster than claims on larger policy. Sabo explains that many life insurance companies have raised their minimum death benefits to $50,000 because it is not worth the time to process the application and do all the underwriting for smaller policies. Quote, some companies specialize in final expense insurance and have created a system and underwriting to sell smaller policies and make smaller profits, but they are doing volume, end quote he says. So basically, you might have an insurance, he's saying that basically a normal insurance policy might be, this is my interpretation, a normal insurance policy might be better, but typically you're gonna have that higher death benefit, which is good, but the higher death benefit will possibly have higher premiums. So possibly you just want to have the premiums that are enough at death to pay for the funeral costs, which means you want the lower payouts because that will often result in cheaper premiums, which means you might still get these, you know, the final insurance in order to do that, but it's usually not worth it to the insurance company to have those small policies. However, if you are specializing in a company that sells those kinds of insurance policies, you can kind of streamline because all of your insurance is gonna be doing that one thing and you could possibly make the process of the registration faster to do so, but then you have to, it's a volume game, they gotta sell a lot of policies in that case. In between option, so we've got the graded benefit, final expense insurance, there's a third type of final expense insurance and that's the graded benefit policy with a partial waiting period. The type of policy might pay 30 to 40% of the death benefit if the insured dies during the first year the policy is enforced and it might pay 70% to 80% if the insured dies during the second year of the policy in is enforced. If the insured dies after these first two years, then the policy would pay 100% of the death benefit. So now you've got that two year kind of thing with the waiting period, but now it kind of phases in type of thing. So if you have health conditions that are only semi serious, you might qualify for a graded benefit policy instead of a guaranteed issue policy. Examples include entering remission from cancer in the last 24 months, having congestive heart failure or being treated for alcohol or drug abuse in the last 24 months. By comparison, a more serious condition such as a terminal illness, currently being in cancer treatment or having had heart surgery in the last 20 months would only allow you to qualify for a guaranteed issue policy where you'll have to wait at least two years for any coverage. No single insurer offers the best final expense insurance across the board says Martin. It's important to get offers from multiple insurance companies to find the ones that view your health most favorably. Those companies will likely offer you the best rates, trying to qualify for a policy that has health conditions is another way to keep rates down. So in other words, if you can qualify for insurance that has the health conditions, that's usually beneficial to the insurance company because it lowers risk by them knowing what those conditions are. And so that's usually the way to go if you can. Even if you have a less than ideal answer to a health question, it does not mean every company will reject you. Some may offer you immediate coverage with higher premiums and graded benefit policy or a guaranteed issue policy. Sometimes choosing the least expensive policy for which you qualify makes the most sense. However, if you are working with an experienced life insurance broker who sells policies from lots of insurance companies instead of an agent who only sells company insurance, your broker may be able to advise you on which companies are easiest to work with. Some provide better service to applicants and policy holders than others according to a Martin. That said, some people will need to choose the least expensive option, even if the customer service might not be very good.