If life insurance wasn’t already confusing enough, we now have companies and agents using funky names for products to help with the marketing. This isn’t necessarily a bad thing because the monikers they are using pretty much indicate what the insurance is used for. Other than mildly confusing consumers who already have a level of trepidation when it comes to life insurance, these monikers or nicknames simply muddy the waters of this very valuable product which begs the question, if Final Expense Insurance a Product or Purpose?
In the life insurance industry, nicknames are regularly used to point to what a policy does rather than what a policy is. Let’s look at some examples.
- Mortgage Protection Insurance: Mortgage protection insurance, also known as a mortgage protection plan, is not a type of life insurance. It is simply a purpose that life insurance is used for; protecting your mortgage debt. When the policyholder dies, the beneficiary uses the death benefit to pay off the family mortgage. Although mortgage protection plans are usually funded with term insurance (it’s the cheapest) it could just as easily be funded with Universal Life. So, you have mortgage protection insurance that is funded with either term insurance or some other type.
- Key-Man Insurance: Once again, key-man insurance is not an actual type of insurance; it is a purpose of the insurance. Key-man insurance is purchased by many businesses in order to financially protect the business from the lost revenue that would result if a key-person in the organization died unexpectedly. Here again, any type of life insurance could be used to fund the key-man insurance plan.
- Final Expense Insurance: Final expense insurance is an insurance purpose, not an insurance product. A consumer typically purchases final expense insurance to pay for the various final expenses that are left when a person passes away. Although the bulk of the death benefit would be used for funeral and burial expenses, there are other final expenses like a nursing home or medical bills that should be covered as well. To make the matter even more confusing, final expense insurance is also referred to as burial insurance and funeral insurance. It can also be funded with multiple insurance types, such as whole life insurance (most popular), universal life, and term insurance.
- Funeral Insurance (Burial Insurance) Funeral insurance, also referred to as burial insurance, is a designated insurance policy that is purchased to pay for, you guessed it, your funeral (or cremation). It can also be funded by term insurance, whole life, or universal life. In most cases, whole life insurance is used for funeral insurance because it will stay in force for the entire life of the policyholder as long as the periodic premium is paid and also because insurance companies are willing to sell small policies ($10,000 – $15,000) to accommodate the cost of the funeral.
It’s important that for consumers not to mistake the “purpose” of their life insurance policy for the “type” of insurance they are purchasing.
How can I tell What Type of Insurance I’ve Purchased?
Certainly, when you purchase your final expense insurance, your agent or broker is going to explain the type of insurance that you are purchasing, or at least they should. But for most people, after the insurance policy is delivered, they thumb through the pages and find the legal jargon and the will typically put the contract in a safe place, never to be seen again. Typically, the only time a question comes up is when there is a billing issue. You really should look closer nonetheless.
When you review your life insurance package, it will generally include a welcome letter of some sort, some billing information, the policy contract, and a copy of the application that you signed either physically or electronically. If your policy is whole life or universal life insurance, there is usually a “statement of values” page that illustrates the cash value schedule for the life of the policy.
While reviewing one of my life insurance policies, I noticed that one policy had the policy type listed on page 19 of 22. It took a while, but I finally found it. This particular policy was purchased as Final Expense Insurance, but nowhere in the 22-page packet of legal jargon could I find the words “Final Expense Insurance” which brings me back to final expense insurance is a purpose, not a product.
How will My Beneficiary Know What the Policy is For?
This is the $64,000 question! If you have multiple life insurance policies (many people do) how will the beneficiary know what to do with it? And what if the policy was purchased for three specific things? As I mentioned earlier, nowhere in the policy package is the reason or reasons for the policy listed. You have to have that conversation with your beneficiary or beneficiaries.
I know, the next question is “what if they forget?” First, let’s be clear about the beneficiary’s legal responsibility when they receive the death benefit after you’ve died. There is none. Unless you assign your policy death benefit to a trust or entity, your beneficiary can spend the money however they want to. This is certainly all the more reason why you should select a beneficiary that you can trust with your last wishes and have that conversation with them.
Since my spouse is the beneficiary on my policies (3 of them), I’ve just put a sticky note on the first page of the contract so she will know what to do with it. But remember, it’s her choice, and I won’t care because I’ll be gone.