If you’re considering a life insurance policy for final expenses, there are a few key pieces that are important to understand. No one wants any surprises with their insurance, especially when we’re talking about life and death.
This article focused on final expense insurance policies that do not have any investment components. Since we are talking about permanent insurance, let’s plan that a policy will be in place for the rest of your life. When understanding insurance, rather than asking ‘What happens if I die?’, you need to think about: ‘What happens if I die soon?’ and ‘What happens if I live for a very long time?’ We’re not trying to be morbid here, but if you’re considering life insurance lets just get that part out of the way.
PART ONE: ALL ABOUT THE MONEY
Ask: How much will my final expense insurance cost?
For traditional insurance that asks more in-depth health questions, Insurance prices are usually quoted at “standard health” or “standard risk” prices. It doesn’t mean a person has to be in perfect health, it means the insurance cost is based on the average health risks are for a person your age. The cost typically includes any administrative costs from the insurance provider.
TIP: You can save about 8 to 10% by paying your insurance annually instead of monthly. If this appeals to you, ask for an annual quote.
Ask: Is the monthly price I was quoted guaranteed?
If you are approved at that same health category, your price will be what was quoted. If your health is better or worse than “average”, then the cost may be different, or your application may not be approved. There are lots of insurance products available for people with moderate or serious health conditions. Sharing your health information with your insurance person will enable them to get the right product for you (and an accurate quote). For simplified insurance, there are few or no medical questions. The price will be higher than traditional insurance, but what you see is what you will pay for.
Ask: Will the price ever go up?
There are two ways that products are priced: level or increasing.
Level Cost Insurance
“Level” cost means what it implies – the monthly price always stays the same. For covering off your final expenses, this is the most common and safest option.
Be aware that if you live a long time (yay) you will always pay the same amount each month, but for a longer period of time. If you pass much sooner, the total payments out will be less. Regardless of how long you live, the death benefit will be the same in the policy.
Why is this so important?? Because some products are marketed based on a low initial price, then they renew and get VERY expensive. And for anyone that is past their working years, increasing payments are a terrible idea.
That leads us into the other pricing option: increasing.
Increasing Cost Insurance
These type of payment options are called “Annual Renewal Term” (ART) or “Yearly Renewable Term” (YRT). That low minimum price? It’s only for the first year – it gets higher every year until you pass away.
So if you live a very long time (yay), the price becomes astronomical (and potentially unaffordable) in your later years. If you have to cancel a policy because you can’t afford it, all those earlier premiums go to waste.
SIDE NOTE: If you have endless buckets of money and don’t have to worry about higher costs, well that’s great. However, if that’s the case, this likely isn’t the best product still (there are wealth-focused strategies that might be better suited)
Ask: How long will the payments last?
Final expense life insurance plans with level payments can be structured so you pay one of two ways: (1) for the rest of your life or until you are 100 years old; or (2) until you reach a certain age and then the policy remains in place for the rest of your life.
Paying “forever” is usually called “Term-to-100” or T100 policies.
The cost is the same ever month and the payments are required until you die.
Policies that are paid in a shorter period of time are sometimes called “20 Pay” (or something along those lines). It means that you pay a level cost that is (quote a bit) higher than T100, but only for a set period of time. Once the payments are completed, there are no payments and the insurance is in place for the rest of your life. If you die soon, you still get the same death benefit as if you lived to be 105 years old.
TIP: This appeals to come people that are concerned about having scheduled payments in their later years. While this seems great in theory, the higher cost per month can be significant and many people choose to have either more coverage or a lower payment.
Basically, we suggest that you spend a bit of extra time when you are deciding what policy to apply for so there are no worries after the fact. Connect with an insurance person you trust and let your insurance person flush out the finer details (it’s their job) to connect you to the best possible policy.
Takeaway: Get a product that fits within your budget for now and for later. Then you can sit back, maintain the payments and focus on living your best retirement life.