There’s a joke among estate planners that with a perfectly crafted estate plan you’ll “bounce your last check.” The idea being that you’ve saved exactly as much as you need to comfortably retire and have made only those sacrifices necessary to stick around for as long as your retirement savings last. While an economist might consider this to be maximizing the utility of your finances over your lifetime, the reality is that most people pass on outstanding debt or obligations to their loved ones, and “bouncing your last check” doesn’t leave much for burial expenses. Some people turn to final expense insurance to make sure that those costs aren’t passed on to loved ones; but is it worth it?
Final expense insurance is commonly known as a “burial policy” or “cremation insurance” and is typically a small whole-life insurance policy which offers less than $50,000 in benefits. (Most policies fall in the $10-20,000 range because that aligns with the average burial costs for most Americans.)
How Much Does Final Expense Insurance Cost?
Because final expense insurance is a whole-life policy, premiums are directly tied to your age, health, and gender. A healthy man in his 50s, for instance, could face monthly premiums of $30-40 which can rise over time, while a healthy woman in the same age range will likely find premiums of $20-30. (As you enter your 70s and beyond, expect rates to rise to the $70-100 monthly range.)
Depending on the insurer you work with, it is possible to find policies where you lock in a premium at the inception date of the policy and your coverage amount is locked for as long as you continue paying.
These plans also accrue cash value (like other whole-life products) which you can draw against should you face a financial emergency. This will reduce the payout to beneficiaries if you are unable to fully repay any borrowed value.
Who is Final Expense Insurance for?
Because these policies are typically much smaller than traditional life insurance policies, they are more easily approved and require that you complete a health screening questionnaire, but you won’t have to go through a medical exam.
That can make these policies more attractive for individuals with underlying non-terminal medical conditions, but keep in mind that there may be a coverage delay that prohibits your beneficiaries from utilizing the policy for the first few years. It will vary by insurer but it’s worth taking note of.
If you have other life insurance policies that you plan to maintain for the remainder of your life, adding a final expense insurance policy is probably just an unnecessary added step that will require your beneficiaries to do more paperwork and potentially have to work with another insurer.
Saving as an Alternative to Final Expense Insurance
The benefit to most insurance products (including life insurance and annuities) is that you’ll receive a fixed value at a fixed (or close to it) price over time, regardless of interest rates or market returns. In exchange for those guarantees, you give up the hassle of managing investments and a great degree of upside potential.
If you’re still young, or relatively so, or are covered by term life insurance via a current employer, you may be better off simply setting aside a few dollars each month instead of investing in final expense insurance. If you are, for instance, a healthy 55-year-old man that receives life insurance through work, you would expect to pay about $35/month for final expense insurance. That translates to about $400/year.
If you saved that in a money market account until retirement age at 65, you’d have set aside $4,000 to cover those final expenses. If you invest it in equities, mutual funds or ETFs with an average annual yield of 6.5% you will have saved almost $6,000 dollars at age 65. Even if you stop contributions at age 65, your investment at those rates will be worth $11,000 by the time you reach 75, which exceeds national average final expenses.
Final expense insurance can be useful if you’re living on a fixed income that can support your monthly premiums and if you’re looking for the peace of mind of having a little something extra set aside to cover your final expenses. That being said, if you’ve got a longer timeframe to save, already have life insurance coverage, or have other assets set aside, final expense insurance may not be right for you. Ultimately it will depend on your specific health and planning concerns and the policies available to you. If you’re actively considering adding a policy, talk to your preferred insurer for more specifics.