Final Expense Insurance

Final expense insurance is life insurance bought to leave a modest, quickly available sum at death, typically enough to cover a funeral, an unpaid medical bill and the loose ends of an estate. It is generally permanent coverage rather than term, so it does not expire at an age the buyer is likely to reach, and the face amounts are small: Washington's Office of the Insurance Commissioner, which calls the family funeral expense life insurance, describes death benefits for "standard funeral insurance" as "often low, ranging from $5,000 to $25,000."

The name describes a purpose, not a contract type, which is why what arrives under it varies so much. The distinguishing feature is not the policy form but the underwriting, and the label spans a range from a fully underwritten small whole life policy at one end to a no-questions contract with a waiting period at the other. A buyer who does not know which grade is on the table does not know what has been bought.

Three underwriting grades sell under this one label, and the middle one is the least well defined. At one end sits a fully underwritten small whole life policy, priced on the applicant's own health, which is simply an ordinary policy in a small size. At the other sits guaranteed issue coverage, which asks no health questions and pays a graded death benefit: die of natural causes inside the waiting period and the beneficiary receives the premiums paid rather than the face amount. That end of the ladder has its own page. In between is simplified issue. A July 2017 report by the American Academy of Actuaries' Life Experience Committee and the Society of Actuaries' Guaranteed Issue/Simplified Issue Working Group, exposed for comment by NAIC's Life Actuarial Task Force, described the tier as having "[a] shorter application than that used for fully underwritten business, with a greatly reduced number of underwriting questions" and "[a]n underwriting decision-making process that takes a short amount of time relative to fully underwritten business, with simplified issue applications often accepted or rejected within a day of receipt." The same report noted that it had to define the category residually, as "individual life business remaining after applying the above exclusions and excluding guaranteed issue business and preneed business." A grade defined by what it is not is a grade a shopper has to identify from the application in front of them rather than from the name on the brochure.

The question that identifies the grade is short: what happens if I die next month? A fully underwritten or simplified issue policy generally pays the full face amount from the first day, which is what a buyer assumes. A guaranteed issue policy pays only the premiums, usually with interest, if death inside the waiting period is from natural causes. Two policies quoted at similar monthly premiums can differ entirely on that one answer, and it is the answer that decides what the coverage is worth to a 74-year-old buying it because a diagnosis has just arrived.

The design is old, and the lineage explains the economics. NAIC's glossary still carries an entry for industrial life insurance, "also called 'debit' insurance", defined as coverage "under which premiums are paid monthly or more often, the face amount of the policy does not exceed a stated amount, and the words 'industrial policy' are printed in prominent type on the face of the policy." Frequent small premiums, a capped face amount, and a distribution model built around collection are the same three features the modern product carries. A policy sold in tiny amounts with frequent collection costs more per dollar of coverage to administer than a large annual-premium contract, and that cost sits inside the premium whatever else is going on.

One state's licensing rule is unusually revealing about how the market is organized. California's Insurance Code provides that an applicant for a life license "limited to the payment of funeral and burial expenses" who is limited by written agreement with an insurer to transacting "only specific life insurance policies or annuities having an initial face amount of twenty thousand dollars ($20,000) or less that are designated by the purchaser for the payment of funeral and burial expenses, shall not be required to take the full life agent examination to obtain a license", taking instead an examination on the policies they are restricted to selling. That is one state's rule and not a national one. What it shows is that this product is sold in enough volume, by enough people who sell nothing else, that a state built a separate licensing lane for it.

The regulator's cost warning is arithmetic, not opinion, and it is worth working through. Washington's insurance regulator states that "[w]hat you pay for premiums may cost more than your funeral." On a permanent policy the premium continues for life while the face amount is fixed, so there is an age at which cumulative premiums cross the death benefit. Where that age falls depends entirely on the price and the face amount, and it is calculable from the two numbers on the quote. It is not an argument that the coverage is worthless, because insurance is bought against the case where death comes early rather than late. It is an argument for doing the division before signing, and for comparing the result against the alternatives, which include a small term policy where the applicant's health allows one and a payable-on-death account where it does not. How those routes compare for funding a funeral belongs to the funeral costs page.

It is not a contract with a funeral home. A final expense policy pays a beneficiary, and Washington's regulator notes that beneficiaries "can use those benefits in any way, including paying for your funeral, medical bills, legal costs or debt you owe." A preneed policy, by contrast, "pays the funeral provider you choose." The first buys money and flexibility; the second buys goods and services at a provider named in advance. Both are sold to the same buyer for the same reason, and the difference in who receives the payment is the whole difference between them.

One naming trap is worth knowing, because it decides a benefits question. This product is sold interchangeably as burial insurance, but Social Security uses that phrase as a defined term for something narrower. Its program manual defines burial insurance as "a contract whose terms preclude the use of its proceeds for anything other than payment of the insured's burial expenses", and states flatly that "[b]urial insurance policies are not life insurance policies" for Supplemental Security Income purposes, where such a policy reduces the burial funds exclusion by its face value. An ordinary final expense policy, whose beneficiary may spend the proceeds on anything and which usually builds a cash surrender value, is not burial insurance in that sense. Anyone whose eligibility for a means-tested benefit is in play is asking a resource-counting question rather than a product question, and the answer turns on the contract's own restrictions.

The applicant chooses a face amount, generally somewhere in the low five figures, and an underwriting route. Depending on the grade, the application is fully underwritten, answered with a short health questionnaire, or accepted without health questions at all. The policy is permanent, so the premium is scheduled to be paid for life and the coverage does not expire at an age. At death the named beneficiary files a claim and receives the face amount, subject to the waiting period if the policy is a graded-benefit contract, and can spend it on anything.

A hypothetical, to show the calculation the regulator's warning points at. Suppose a 68-year-old buys a $12,000 policy at $76 a month, which is $912 a year. Cumulative premiums reach the face amount after $12,000 divided by $76, which is a little under 158 months, or about thirteen years and two months, at roughly age 81. A policyholder who lives to 90 will have paid 22 years at $912, which is $20,064, for a $12,000 benefit. A policyholder who dies at 72 will have paid four years, or $3,648, for the same $12,000. Both outcomes are the product working as designed, because insurance prices the average and pays the individual. The figures are invented for the arithmetic, and the useful step is to run the same two divisions on the actual quote before signing rather than after.

The follow-through is to check three things on the illustration: the face amount, whether the full benefit is payable from the first day, and whether the premium is scheduled to stop at some age or to continue for life. Those three answers, plus the buyer's own health, decide whether this product or one of its alternatives fits.

Pros

• Acceptance is achievable at ages and in health conditions where ordinary individually underwritten coverage is expensive or unavailable.
• The money reaches a beneficiary quickly and can be spent on anything, which is what a family actually needs in the first weeks after a death.
• Premiums are small in absolute terms, which makes the coverage affordable out of a fixed retirement income.
• The coverage is permanent, so it does not expire at an age the buyer is likely to reach, which is the failure mode of a small term policy bought late.
• Face amounts are sized to a real and reasonably predictable obligation rather than to an income-replacement calculation.

Cons

• Per dollar of eventual benefit it is among the most expensive ways to buy life insurance, and Washington's regulator states plainly that premiums "may cost more than your funeral."
• A policyholder who lives long enough will pay in more than the policy pays out, and the crossover age is calculable from the quote at the point of sale.
• Three quite different underwriting grades share the name, so the brochure does not tell a buyer whether the full benefit is payable from day one.
• A guaranteed issue contract returns only premiums, usually with interest, for a natural-causes death inside the waiting period, which is exactly the case a buyer in poor health is insuring against.
• The premium is scheduled for life on most designs, so a policy stopped in the later years can leave the policyholder with far less than was paid in.
• An applicant in reasonable health who could obtain a small underwritten policy is very likely paying more here for less coverage.