Type of Final Expense Insurance

Kim Wilhelm CEO of Final Expense Direct Life Insurance
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Written by Kim Wilhelm

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Last Updated 24 Sep 2021

What is a Simplified Issue Final Expense Policy?

Simplified issue final expense or burial insurance takes a different look at traditional eligibility requirements for life insurance, making it easier for those older and with minor health issues to enroll.

Final Expense as a Whole

Generally speaking, what is final expense insurance? These policies provide a payout, known as a death benefit, to chosen beneficiaries upon the policyholder’s death. Certainly not a pleasant topic for anyone involved, but extremely helpful and necessary to cover important final expense costs.

With death benefits ranging from $2,000 to $50,000, these policies can cover items such as your funeral arrangements, medical bills, estate taxes, credit card payments, and more. This way, it is out of the hands of your loved ones to cover on their own.

A Broad Look at Simplified Issue

Let’s narrow this down to simplified issue final expense insurance. Simplified issue is designated by the enrollment process. When you go to sign up for a final expense policy, you will get to choose whether or not you want to sign up under a simplified or guaranteed issue policy.

Simplified issue will ask minor, very broad questions regarding your health. This will include “yes” or “no” questions such as whether or not you have/had cancer, heart disease, AIDs, etc.


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Simplified Vs. Guaranteed Issue

Compare this enrollment process to guaranteed issue—rather than asking these simple questions (known as medical underwriting), guaranteed issue skips the process altogether. In other words, you can enroll in guaranteed issue if you are not eligible for simplified issue.

Why choose simplified issue? Well, if you qualify, it is cheaper than guaranteed issue. Because simplified issue gathers basic health information to determine your risk, they are able to lower your premiums compared to guaranteed issue, which assumes you are at some sort of health risk.

Simplified issue is great for those who want life insurance but may not qualify for other policies, yet are healthy enough to choose it over guaranteed issue. 

It is an excellent policy to purchase if you want funeral coverage but already have a whole or term life policy. It is also helpful if you are no longer eligible for those bigger policies, most likely due to age. You can have minor health issue with simplified issue that would otherwise disqualify you from other policies, making it an excellent middle-of-the-road qualification option.

Why You Should Consider Simplified Issue

The question is, then, is simplified issue right for you? At the end of the day, this depends on your eligibility and own life insurance goals. If you are eligible, it is an incredibly helpful and often necessary source of financial coverage. And, if you are looking for a plan to cover your funeral and other important final expenses, it will be a huge benefit to you and your loved ones.

Final Expense Insurance vs. Pre-Need Insurance

Final expense insurance and pre-need insurance are often discussed together because they focus on the same area: final expenses. They are the two main options available for planning your funeral ahead of time. However, they’re not the same plans. 

What Is Pre-Need Insurance?

People use pre-need insurance to cover the costs of funeral services, plus burial or cremation. It essentially gives your family a pre-arranged funeral, making things easier on them. 

You work directly with a funeral home, which makes it unique to other kinds of insurance. They’ll price costs, including services, cemetery plot, casket, burial, and so on. Then, your insurance plan pays for those expenses. Costs may vary from home to home.

Since the funeral home is the beneficiary of a pre-need policy, they’ll receive the money directly to cover their services.

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What’s the Difference Between the Two?

Pre-need insurance (also called pre-paid funeral plans) are bought from a particular funeral home. You pay a preset amount directly to the home. 

Meanwhile, final expense insurance operates like other types of life insurance — you select the beneficiary. The death benefit goes to your family, and they can use it to cover funeral costs or any last medical bills or post-funeral costs.

Note: With a final expense policy, it’s possible to pay the funeral home directly. Your family will get whatever is remaining after the funeral home pays their expenses. It’s called “making an assignment.” 

Final Expense vs. Pre-Need: Comparison Table

As a visual aid, here’s how pre-need and final expense plans differ:

Final Expense
Pre-Need 
Very flexible – can be used anywhere in the world
Very limited – can often be used only at the funeral home
Additional benefits typically available in the form of policy riders
Additional benefits aren’t typically offered
Money is paid directly to the beneficiary
Money is paid directly to the funeral home
Families may price-shop funeral services for the best deal
Funeral home sets prices; no price-shopping is available
Policy benefit may be divided among multiple people or organizations
Policy benefit is only for the funeral home
Usually builds cash value; can be withdrawn as a policy loan 
May or may not build cash value

While they offer more flexibility than pre-need plans, not all final expense policies are the same. 

What Else Should I Know?

Older or less healthy folks may benefit more from final expense insurance because these policies: 1) will probably be more affordable, and 2) still have a flexible death benefit. 

Guaranteed Services and Non-Guaranteed Services

Some folks live long after arranging their pre-need plan, which may cause the funeral costs to rise. Whether or not your family has to pay the difference depends on if the expenses were guaranteed or non-guaranteed services. 

The funeral home will always cover the cost of guaranteed services, no matter your plan’s value. However, a beneficiary may need to atone for non-guaranteed services. 

Are Pre-Need Plans Worth It?

Pre-need insurance is often not worth it because of its restricted use — the benefits are tied to the specific funeral home you choose. Most pre-need plans are non-transferable and non-refundable. You also pay a lot for a small coverage amount. Plus, if your selected funeral home goes bankrupt, you may be ill-fated. 

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Final Expense vs. Universal Life Insurance

Each life insurance policy has its own appealing qualities, with different mechanisms in how it works. Some allow you to have a plan that will always stay with you if you pay your premiums, and others have unique investment features that you can take advantage of through the duration of your policy. Here we will focus on how that works with final expense and universal life insurance.

Different Emphasis

The emphasis of funeral insurance is on covering funeral costs, which is reflected in the common death benefit amounts — typically between $5,000 and $20,000. Compare that to funeral costs which average $9,000. So, there’s usually enough to pay these expenses.

The universal life insurance emphasizes the policy’s cash value, which accrues interest.

They Both Have Different Versions, But for Different Reasons

Final expense insurance has three versions – typical final expense insurance, graded benefit, and guaranteed issue:

  • Regular final expense insurance doesn’t always have a waiting period. This is the most exclusive of the three types, as the potential for rejection is higher. Applicants are more likely to obtain this if they are in overall good health and are relatively young.
  • Graded final expense insurance’s tie between health and waiting periods applies to those with semi-serious conditions. The waiting period is two years. Dying in the first year of the waiting period disburses around 30-40% of the death benefit to beneficiaries, and 70-80% if the policyholder dies in the final year of the waiting period. The benefit is 100% after that.
  • Guaranteed issue’s relationship between health and waiting periods involves policyholders on the brink of death. The waiting period here is two years, and if the policyholder dies in that time, his or her loved ones will receive nothing.

Universal life insurance’s variations have to do with how the savings account’s cash value accumulates. There’s fixed, indexed, and variable universal life insurance. The difference between these are:

  • With fixed universal life insurance, the cash value builds at a slower rate than the other two types because the interest rates are lower. Portfolio performance controls this buildup.
  • Indexed universal lets policyholders decide how much to put into indexed accounts. The funds do not go directly into the stock market. They’re based on the performance of a financial index.
  • Variable universal works in a way similar to a mutual fund. Instead of basing the cash value buildup on stock indexes, it’s mutual funds. 

They Lapse in Different Ways

Final expense insurance death benefits are guaranteed as long as the premiums are met, but the beneficiaries may not receive any money if the policyholder dies in the waiting period.

For universal life insurance, one can lose the policy if he or she lets the cash value drop below the costs to maintain the insurance policy. Excessive borrowing from the cash value and poor market performance can make someone lose a policy.

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Final Expense vs. Whole Life Insurance

Final expense and whole life insurance are similar, but there’s a difference that makes them ideal for separate demographics. We will look at what you can do with the death benefit, how to get the most out of your policy and examine how a final expense candidate might not be right for a whole life insurance policy.

They’re Closely Related

Final expense and whole life insurance are similar – join the policy, pay the premiums, and your beneficiaries receive an untaxed death benefit. Both last a lifetime and don’t require renewal.

This is why final expense insurance is considered a type of whole life insurance. But given these similarities, we will see how they are not one in the same.

Different Target Audiences

Final expense focuses on seniors. They’re at the point where they are not just thinking about the money passed onto their loved ones, but how other arrangements will be carried out. The death benefit amount is relatively close to the average funeral cost. Death benefits tend to be between $5,000 and $20,000. Funerals are usually in the neighborhood of $9,000.

Whole life insurance has a broader audience because of how it can be used for when the policyholder is still alive. This type of insurance enables policyholders to have a separate account where money accumulates – this money is referred to as the cash value.

Making Use While You’re Still Alive

Final expense insurance can accrue in value, too. You can make use of it by adding an accelerated death benefit, which gives you a percentage of your death benefit when you’re diagnosed with a terminal illness. You decide how much of the death benefit you want to be accelerated. For instance, you opt to accelerate half of your death benefit. Once you contract a serious illness, you contact your insurance company. They offer a lump sum amount, and you receive that payment, and your premiums are lowered as if your death benefit had been reduced by half.

For whole life insurance, the cash value in the separate account can be borrowed against and paid back. If it isn’t paid back, then that amount is deducted from the death benefit. Your cash value is also invested, but your insurance company decides how it will be invested.

Qualifying

Final expense insurance is less discriminatory, giving an option for those with conditions that would cause other insurance policies to reject them – the guaranteed issue policy. Whole life insurance has no such option.

Whole life insurance is prone to rejecting applicants because as in the world of insurance in general, the insurance company is taking a chance on insuring individuals. If they insure someone with a terminal disease, then they will not be paying premiums long enough in order for the company to release funds and remain profitable.

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Final Expense vs. Term Life Insurance

Final expense insurance and term life insurance are both low-cost insurance options. Both of them have a death benefit that gets paid upon the policyholder’s death. But here we’ll see that there are many stark contrasts between these two, and in the end, you can see which is the right one for you.

Who Are These Two Policies For?

Final expense insurance appeals to seniors who want to leave money behind for their loved ones, but have a difficult time obtaining a traditional life insurance policy. Final expense insurance doesn’t expire.

Term life insurance is for those wanting an inexpensive life insurance policy just in case something happens to them. Term life insurance can reject you due to age or overall health. Term life insurance is relatively inexpensive because policies are only in force for a short period of time. However, the policies don’t last forever. You can outlive your policy, and have to choose between letting it lapse, renewing coverage, or upgrading to permanent insurance.

Joining

Joining a final expense insurance policy is fairly easy. There are no medical exams, only medical questions. While the applicant’s health still has an effect on insurability for a standard final expense policy, final expense has an option for those in significantly declining health. A person with nowhere else to turn for coverage can get a guaranteed issue policy and receive a death benefit in a short matter of time.

For term life insurance, the individual’s health status is closely evaluated to determine insurability. Factors such as age, sex, policyholder’s health, state regulations, interest rates, and the company’s financial state all influence the monthly premium costs.

Each Has Different Types

There are a few different types of final expense insurance: 

  • Traditional final expense insurance – can come without a waiting period. This policy is best for those in good health who join when they’re first able to. 
  • Graded benefit – two-year waiting period. This is for those with semi-serious conditions. Your beneficiaries get a percentage of the death benefit. If you die during the first year, your loved ones get 30-40%, and  70-80% the second year.
  • Guaranteed issue – two-year waiting period. If you’ve been rejected from other types of insurance because of poor health, then this is the one to get.

Term life is split into:

  • Level term – no changes in premiums or death benefit. This costs more, in the beginning, to account for future rising costs
  • Yearly renewable – you can renew the term annually. You don’t have to prove that you’re insurable, but the premiums go higher
  • Decreasing term – you pay the same in premiums, but the death benefit decreases over time

Can Medicaid Work With Final Expense?

For seniors to remain eligible for Medicaid for long-term use, they must have limited assets. This means cash savings and other funds or assets may disrupt their ability to qualify for Medicaid benefits. But with few assets, how will you pay for your funeral expenses? The answer is final expense insurance. Final expense insurance can help you ensure that your burial needs are taken care of before you pass away. 

Medicaid Asset Limits

In most states, the federal asset limit for Medicaid is $2,000 for any single applicant. Therefore, any Medicaid applicant with more than that amount of assets would be ineligible to sign up for Medicaid benefits. To avoid this asset limit, they can use their funds to purchase an irrevocable funeral trust or final expense insurance. 

What Is An Irrevocable Funeral Trust

An irrevocable funeral trust (IFT) is a fund that you can purchase to ensure that your funeral expenses are paid for. The funds are considered uncountable assets, meaning that you can use them to lower your countable assets before death. This will allow you to maintain your Medicaid benefits if you need them. IFTs do not violate Medicaid’s look-back period, therefore you will not be penalized for creating the trust. The downside of this, though, is that the fund can only be used to pay for funeral costs after you die. Any funds not used on the funeral will likely be given to the state, since they are normally listed as the residual beneficiary for IFTs. 

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Final Expense Insurance vs. Irrevocable Funeral Trust

If you want to make sure that your funeral is paid for, but don’t want the funds you have to only be used on your funeral, final expense insurance may be the solution you are looking for. To avoid Medicaid’s asset limit, you can invest in an irrevocable trust life insurance policy. This is a type of final expense insurance policy. With IFTs, Medicaid allows people to save a maximum of $15,000 to be used for funeral expenses, and the amount can be funded with a single premium or through several installments. 

This is unlike a traditional life insurance policy, as in most cases, laws will require you to spend down the entire value of a traditional policy to keep your Medicaid benefits. Medicaid is usually unable to attach itself to irrevocable life policies, therefore you will certainly have the death benefits when you pass. Simply transfer your cash to the irrevocable trust to avoid Medicaid’s spend down requirements. 

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