I had a friend come into the office recently that had a question about buying final expense insurance or, put more bluntly, burial insurance.
This is life insurance that can be bought without having to go through the traditional medical exam, a plus for older or ill individuals. I told her I wasn’t sure, but I thought it wasn’t necessarily a good idea. It reminded me of a relative of mine who used to pay for terrorism insurance.
You can buy insurance for almost anything these days, but generally, my rule is if you can self-insure it’s usually better to do that.
After she left the office, I did some research and found a website where I could easily get a quote on a particular $10,000 guaranteed issue life insurance policy.
I tested it out on a 74-year-old male, and the cost was only $136 per month. Now that doesn’t sound too bad for $10,000 worth of coverage; however, if you die within the first two years, the policy doesn’t pay!
So you don’t want at death’s door and buy these policies. If you buy one and die within the first two years, you “lose”. You do get your money back, but you don’t get the $10,000.
When I did the math on the $136 per month, it came out to $1,632 per year.
When we take $10,000 and divide it by $1,632, the breakeven point is 6.12 years
So if you die within the first two years, you just get your money back with interest, and if you live longer than six years you’d be better off putting it under your mattress! So you are basically betting to die in the next 3-5 years to “win”…
I’m not an expert on these policies, but after doing a little research, next time the topic comes up I’m more prepared to tell my friend to pass on this type of insurance.
Sometimes a simple savings account with some discipline can work best.
Thanks for taking a look!
Tom Gartner, MSAPM, CFP®