Before you can advise clients planning for their end-of-life expenses, you must first understand the different financial tools available. Three common products to ensure clients and their loved ones are not overburdened during an already difficult time include final expense insurance, funeral expense trusts, and preneed insurance. Each of these products serves a distinct purpose and offers unique benefits, and understanding their differences can help you give sound counsel as to which product is most appropriate for each client.
Final Expense Insurance
Final expense insurance is a whole life product designed to cover end-of-life costs including funeral costs, outstanding medical bills, and legal expenses. These policies typically have lower face values ranging from $5,000 to $25,000, making them more affordable than other whole life insurance options.
Often requiring only a short health questionnaire, final expense insurance is generally easier to qualify for than traditional life insurance, which typically requires a full medical exam. Premiums vary depending on policy size, age, health, and payment frequency, but they are fixed and remain level throughout the policyholder’s lifetime. Upon the death of the insured, beneficiaries will receive the payout directly, which they can use for any purpose, though it is intended to cover final expenses. This flexibility ensures that any unexpected costs are covered, providing peace of mind to both the policyholder and their family. Because final expense insurance is considered an asset, it may impact Medicaid eligibility.
Funeral Expense Trusts
At the most basic level, a funeral expense trust (FET) is a guaranteed issue, whole life insurance policy. The funds in the policy are assigned to a funeral trust created and maintained by the insurance company. Because the funds are irrevocably assigned to the trust, they are not considered countable assets for Medicaid eligibility.
An FET can be funded with one lump-sum payment or periodic payments, and the policy value typically ranges from $2,500 to $20,000. The insurance company maintains the funeral trust at no cost to the policyholder and pays the funeral home at the time of death. Any remainder of the policy goes back to the estate of the insured.
One significant advantage of a funeral expense trust is the control it offers. FETs allow the policyholder to choose a funeral home and services later, rather than associating their policy with a selected funeral home. This provides added flexibility to the client in the event their needs or desires change. Additionally, the funds are protected from creditors and cannot be accessed by beneficiaries for purposes other than one’s funeral expenses, providing a secure way to manage funeral costs.
Funeral expense trusts are an attractive option for those who want to plan for their funeral expenses, protect funds for Medicaid purposes, and ensure there is immediate liquidity of funds for the family to pay their funeral provider at the time of death.
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Preneed Insurance
Preneed insurance is very similar to a funeral expense trust in that it is designed to pay a funeral home for funeral expenses incurred. However, preneed insurance names the selected funeral home as the beneficiary on the policy at the time of policy issuance, connecting the policy to a specific funeral provider ahead of death. Most often, the policyholder works directly with the funeral provider to plan specific details of the funeral plan. This includes estimates of their desired services and merchandise, although those prices are often subject to change.
Preneed insurance offers the peace of mind that comes with knowing all arrangements are made and paid for ahead of time. Unlike FETs, preneed policies are typically tied to specific funeral services and products, meaning the payout goes directly to the funeral home. Preneed contracts also have higher insurability maximums—often closer to $35,000—and, when properly structured, are also exempt from Medicaid.
Choosing the Right Funeral Product
Ultimately, choosing the right option depends on your client’s specific needs and financial goals. Delineating between each product’s strengths and features allows for the best customization, ensuring the right needs are being met for each client’s unique situation. Understanding these differences will help you guide your client to make an informed decision that aligns with their and their family’s needs.
Funeral pre-planning products provide crucial safety nets, ensuring that your client’s loved ones are not burdened with unexpected financial strain during an already difficult time. By covering the costs of funeral expenses, these products offer peace of mind and allow families to focus on honoring their loved ones without worrying about the financial implications. Schedule a call with us to learn more about funeral planning products and choosing the right option for your client.
