Final expense insurance vs. life insurance

How much do you think your own funeral might cost? Many people don’t realize that funeral expenses can easily run into the low five figures — and that, in addition to creating a will,  preparing for the costs of your own death can be one of the most important gifts you leave your loved ones.

Everybody should have a final expense plan — and for some people, that means applying for a final expense insurance policy. What about you? When it comes down to final expense insurance vs. life insurance, which should you choose?

We’ve put together a guide to help you compare and contrast final expense insurance vs. regular life insurance policies. As you read, you’ll learn how each type of policy can benefit your loved ones, and how you can make an informed decision between final expense insurance and traditional life insurance.

Here’s what you need to know.

What is final expense insurance?

Final expense insurance, as you might have guessed, is a form of life insurance that is designed to cover your final expenses — medical bills, funeral costs and other end-of-life expenses that your loved ones might need to cover after you are gone.

Unlike traditional life insurance policies, final expense life insurance is not designed to provide your loved ones with long-term financial security. Instead, a final expense policy will leave your beneficiaries with just enough money to cover burial expenses and other end-of-life costs. Some life insurance companies use the terms burial insurance or funeral insurance to describe their final expense policies — which gives you an idea of what these policies are meant to cover, and what you and your loved ones can expect from a final insurance life insurance policy benefit.

Technically, final expense insurance is considered a form of whole life insurance. When you take out a final expense policy, it remains active for the remainder of your life — not for a certain period of time like a term life insurance policy. As long as you continue to make your monthly premium payments, your final expense policy will remain active. Plus, your final expense insurance policy may have cash value that you can either borrow against or use to pay future premium payments — though any money you borrow has the potential to decrease the benefit amount your loved ones receive.

Final expense insurance can also be considered a form of simplified issue life insurance, since it rarely requires a medical exam as part of the application process. Some types of final expense insurance are guaranteed issue life insurance policies, which means that everyone who applies for one of these policies is guaranteed to be accepted. However, people who apply for a guaranteed issue final expense policy should know that if they die before a certain period of time has passed — often, two or three years — their loved ones may only receive a portion of the death benefit.

How is final expense insurance different from other types of life insurance?

Final expense insurance is different from a traditional life insurance policy in a few key ways. First, final expense coverage is generally much lower than the coverage you’d apply for with a standard term life policy or whole life policy. Many final expense life insurance policies offer a coverage amount that can range anywhere from low four figures to mid-five figures, providing your beneficiaries with just enough money to cover funeral costs, medical bills, and any other financial burdens they may run into.

Final expense policies are not designed to provide your loved ones with the kind of death benefit that can help cover long-term expenses like monthly mortgage payments or college costs. When you apply for an affordable term life insurance plan or a more expensive permanent life insurance policy or universal life insurance policy, you’re generally taking out enough life insurance coverage to replace your income for years to come. When you apply for final expense insurance, you’re only taking out enough coverage to pay off your final expenses.

Final expense insurance is also different from traditional, medically underwritten life insurance policies in that most final insurance policies do not require a medical exam. This means that some people who might not be able to access a traditional life insurance policy due to their medical history could take out a final expense policy to cover end-of-life expenses.

Here’s one more way in which final expense insurance is different from other types of traditional life insurance — in some states, you can purchase final expense insurance directly from a funeral provider. This type of burial insurance policy can be an affordable way to cover funeral expenses, but you’ll want to make sure you review the policy details carefully so you understand exactly what you’re paying for.

Why do people get final expense insurance?

There are several good reasons to apply for final expense insurance. If you are a senior citizen or retiree who does not need to take out a traditional life insurance policy to replace your income, a final expense insurance policy could help your loved ones cover any unexpected end-of-life expenses. Some seniors apply for final expense policies because they are too old to qualify for term life insurance — but they still want to leave their loved ones enough money to ensure that their death does not cause the family any financial burden.

Adult children caring for aging parents may decide to take out final expense insurance on behalf of their parents — especially if they know that their parents do not have enough savings to cover any potential funeral costs. Members of the Sandwich Generation are often stressed financially, and taking out a final expense policy in their parents’ names is one way for caregivers to help defray some of the expenses associated with a loved one’s death.

People with terminal illness may also consider final expense insurance, especially because they might be ineligible for other types of traditional life insurance. In most cases, final expense life insurance policies come with what is called a graded death benefit. When you take out a graded death benefit policy, the life insurance payout starts out relatively small and increases the longer you remain alive after purchasing the policy. This is to prevent people from purchasing life insurance if they know they are going to die within a very short period of time. If you are considering life insurance after being diagnosed with a terminal illness, try to purchase your policy as soon as possible — that way, the benefit amount your loved ones will receive will have more time to increase in value.

It’s worth noting that there are other ways to cover final expense costs. Some people are able to pay for the cost of their funeral out of their savings and investments, and may even leave instructions in their will on how their family should handle funeral costs. Other people decide to purchase a prepaid funeral plan — either for themselves or for a loved one — from a funeral provider. These prepaid funeral plans allow you to pay for a funeral in advance by putting money into an irrevocable funeral trust, either as a lump sum or in monthly installments. It’s important to distinguish prepaid funeral plans from pre-need plans. If a funeral provider offers you a pre-need funeral plan, they’re generally offering a pre-need insurance policy that is similar to a burial insurance policy. As before, know what you’re getting into before you sign any contracts.

Should you get final expense insurance or life insurance?

Having a plan to cover your final expenses is a good idea — but should a final expense insurance policy be included in that plan?

If you’re considering final expense insurance vs. life insurance, start by asking yourself how much life insurance coverage you really need. Yes, a final expense policy can help your loved ones cover funeral costs and other end-of-life expenses — but are those the only potential financial stressors involved? What about a spouse or partner who might be stuck covering mortgage payments on a single income? What about childcare costs that might accrue as your family transitions to a single-parent household? What about the security that comes with knowing that you have a plan to not only cover your final expenses, but also the income you might have earned from now until retirement?

Some people consider final expense insurance because they believe the premium payments will be more affordable than other types of traditional life insurance. While final expense premiums can be lower than other types of whole life insurance, many people are able to get a term life insurance plan with comparable monthly premiums and a much higher coverage amount. Compare all of your insurance options before choosing between final expense insurance vs. life insurance — and make sure to get some term life insurance quotes so you know exactly how much a traditional life insurance policy might cost you.

What if you don’t qualify for term life insurance? Final expense insurance, burial insurance or a graded death benefit policy might be your best options. Though if you only need enough money to cover funeral costs, you may want to consider a prepaid funeral plan instead of a final expense insurance policy. With a prepaid funeral plan, your contributions typically go directly into an irrevocable funeral trust — and any money you and your loved ones contribute will go directly towards your funeral and burial expenses.

Developing a final expense plan is important — but so is ensuring that your family has the financial stability it needs to cover not only your final expenses, but also any expenses that may come afterwards. That’s why you should think carefully when deciding between final expense insurance vs. life insurance — and why many people look for an insurance policy that not only covers the costs associated with their death, but also provides their loved ones with the security they need to live a good life.