The Danger of Using Term Life Insurance For Final Expenses Podcast Episode 21

In this podcast, I’m going to be discussing the danger of using term life insurance for final expenses. Let’s dive right into this. The first danger is term life insurance policies have a specific term or duration. Typically, a term life insurance policy is going to be issued like in 10 year, or 15 or 20 year or 30 year policy terms.

And what that means is that if you’ve got a 20 year term policy, and you’re age 50, then that policy will terminate term insurance terminate at age 70. Now, is that good or bad? Well, it’s neither. It’s just what the policy does. So let’s say your age, 50 years old, and you had a mortgage of $400,000. And you wanted to make sure that if you passed away, in the next 20 years, the duration of your mortgage, that your mortgage will be paid off. So you could get a $400,000 term life insurance policy that would last 20 years.

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So one interesting aspect of specifically about getting term insurance for a mortgage is, so if the mortgage is $400,000, and you get a term policy, for 400,000, that will pay off the mortgage in full if you die right now. But we know as time goes on, you’re going to be paying that mortgage down. So let’s say at some point, that mortgage is paid down to 200,000, you’ve still got a $400,000 term life insurance policy. Now is that good or bad? It’s neither it just is what it is.

But here’s what you can do. So if something did happen, you’re your family or member, typically your spouse or partner, you can have them be the beneficiary, and you pass away and Expectedly, there’s $200,000 left on the mortgage $400,000 policy, they could take 200,000 of the life insurance benefits, pay off the mortgage, now they’ve got the home paid out free and clear.

And now there’s $200,000 Extra there to replace your income, because remember, you’re dead, you’re not going to be making any more income Six Feet Under, right. So it’s time goes on, it provides a nice little financial safety net, just to maybe pay off some other bills, other expenses. Just replace lost income, anything like that. So it you know, but but here’s the deal.

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You know, here’s the danger is that when that term insurance goes away, it’s gone forever. Now, some insurance companies will let you continue on an annually annual basis, annually, right? To keep that insurance in place, but they’re going to reindex the rates to your current age, now that you’re age 7020 years older. And in most cases, it’s pretty punishing. Meaning it’s enough that most people can’t afford to do that. And it’s generally wise not to do that. I

n that case, you’d be better off typically shopping for a new policy, but you should be reviewing your policy every five years. Anyway, you know, we’d probably recommend at 10 years you review that policy and say, Hey, is that going to be enough? Do I need any more insurance or anything like that 10 or 15 years. So just kind of keep that in mind.

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But final expense, life insurance. You know, that’s intended for expenses that happen at the end of your life. Typically, that’s going to be burial, cremation, something like that. final expense insurance really isn’t designed to pay off home mortgages or anything like that. The final expense insurance can do a great job of protecting the mortgage mortgage, meaning if you if when you die, you the house is going to be sold.

What we can do with final expense insurance is just getting money to make the payments on the mortgage, maybe six, nine months, something like that. And that allows the surviving spouse, spouse, partner or family, whatever that would be to to get the home sold. And now really kind of almost the life insurance benefit is the equity in the home. Because the last thing you want is for the bank to get get the home and all the equity in it just because nobody had the money to make the payments.

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So, yeah, just even protecting the mortgage payments, sometimes when we’re older, is really nice because it, you’re protecting a small amount to get that equity, which could be a huge amount. So the other danger of using term life insurance for final expenses is that if you outlive the term policy, you don’t get any coverage. So if you get a 20 year policy and you live 20 years, in one day, that policy is gone.

And you’re not going to get any money from that. But typically, that’s why we always recommend having some whole life insurance in place, and a smaller amount just to cover your final expenses. Because that way, if you live one day or another 30 years, family’s still going to be protected. And a whole life insurance means is going to cover your whole life all the way up until age 121 term is going to last for a specific period of time, then it’s going to terminate.

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The other danger of using term life insurance for final expenses is renewing term policies can be expensive, especially now that you’re older, and you have more health issues. And that just makes it less practical for covering final expenses. The good news is, is the whole life insurance we use for final expense, burial, cremation insurance, it’s got very forgiving underwriting means you can have a lot of health problems and still get approved for first day coverage. Now, if it’s something significant, like you got a terminal illness, and you’re going to die in the next 12 months, or dementia, or dialysis or you’re in a hospital or in a nursing home, that’s a different story. But you know, don’t don’t wait that long to get this insurance. And that won’t be a problem.

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The other danger of using term life insurance for final expenses is that converting a term policy to a permanent policy may be an option. But it can also be expensive in require additional underwriting a lot of times, it wouldn’t, it’s just not every single policy is set up to convert a portion of the term policy to permanent whole life insurance. If you do, it can be a nice option. But just when you’re shopping around, make sure that your agent sets it up that way for you. But, you know, if you’ve had your policy 510 years, you don’t have that option of going back and ticking off that box or anything.

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The other danger of using term life insurance for final expenses is term policies usually have a maximum age limit for coverage. Generally, that’s around age 80. So if you’re age 60 years old, you could not get a 30 year policy with with really, I don’t think any company because that would put you at age 90, they just don’t, they just don’t do that. That’s not how they roll. But you can get a 20 year policy, right? That would put you age 60 and 20, your policy would go up to age 80. But if you’re 60 years old, and three months, you couldn’t get a 20 year policy with most companies, because that would put you over age 80, you’d have to go down to like a 15 year policy. So just understand, it’s different with each insurance company out there. And you’re gonna have to qualify medically, term life insurance is much more stringent on the underwriting than Whole Life policies.

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So keep that in mind. Term life insurance has a place, but for my not really in final expenses. The other thing is, there’s companies out there that offer term life insurance that will go up in price every five years, that’s typically that stuff you see, that’s going to be advertised as, Hey, your your first payment is only $1. Well, you know what, if they’re using teaser rates, which teaser rates or something that sounds too good to be true, what they really are intending to do in most cases, is get your information, get you into their marketing funnel, and then sell you insurance. And that that dollar a month for your first premium is going to come it’s with it’s called Five year age banded, which means every five years your price is going to go up. And every typically every every birthday that ends with a one or a six. So like age 71, 76, the price is going to go up.

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And the challenge with those policies is that they just get more expensive over time. And they often get so much more expensive. People have to cancel them. And people would have been better off just getting a whole life insurance that was a little bit more expensive at first, but the rates are locked in for the rest of your life. And what happens is if you go with the term life insurance policy, and the price goes up every five years, then in most cases people have to cancel that insurance because it gets so expensive. And then the insurance company gets to keep all of your money it’s been nothing but sheer profit to them. And they’ll never have to pay a penny out on that. So they when you lose a now you don’t have any insurance. So we just, we just don’t recommend those policies.

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And then also they have age limits. So if you do live beyond a certain age, typically after age 80, those plans are going to count cancel, and then they’re gonna keep all that money. And that’s why initially, the premiums are less, because those plans rarely pay out for most people. So when closing our final expense policies are typically smaller, they’re more affordable, they’re not meant to pay mortgages off or replace hundreds of 1000s of dollars worth of income or, you know, get enough coverage to put the kids through college or anything like that. They’re really designed to pay for your final expenses, burial, cremation, anything like that.

And maybe in some cases, you know, some extra bills, credit card bills, medical bills or something like that. Typically, we don’t recommend these policies for leaving extra money behind for kids just spend that money that you would have spent on premiums to get the the increased coverage and spend it on your kids and family members while you’re alive so that you can have those memories while you’re here. And they’ll have those memories for the rest of their life.

The other thing too is final expense policies are designed to cover burial, funeral cremation costs. That’s exactly their whole purpose in life, is to make sure that your family members loved ones or children don’t have to pay these expenses for you. Term life insurance. Not always the case. So just be a smart educated consumer. I think you’re probably miles ahead after just listening to this podcast. But I hope this podcast has been helpful to you.

NOTE: Show notes are AI transcribed, so there may be some spelling or grammatical errors.