By Bryan Tucker posted February 4 2019
If there’s one thing that can be guaranteed – it’s that there’ll be a funeral cover advert running throughout the day on most national television channels. It’s a popular and profitable market for most insurers because they know that older clients are keen to ensure there is enough cash available at short notice to cover their final expenses.
Many people are put off by funeral cover policies because the premiums appear to be too high for such a small amount of cover. A 65-year-old could pay anywhere from $60 to $150 per month for just $10,000 of cover.
Why is it that premiums are so high, and are there better, lower cost, ways to achieve the same objective?
Advantages of traditional funeral cover?
Funeral cover offers some key benefits that aren’t commonly seen with other types of insurance.
1. Guaranteed acceptance
Other than telling the insurer a few basic facts about yourself - like your gender and if you're a smoker - they don't need to know a lot of detail and will automatically agree to cover you. This makes them a great option for people in relatively poor health.
2. Level premiums
Funeral cover premiums usually start high but never change throughout the life of the policy. This gives the policy owner some certainty that they won’t be ‘priced out’ of the policy in future years. It also gives the insurer the advantage of front loading most of the premiums so that its risk is minimised.
3. Fast claims
The insurer usually only needs a limited amount of information to confirm the death of the insured person. Once this has been supplied by a lawyer or family member the claim can be paid in as little as 3 days. This is important as claims on other kinds of life insurance can take some time to settle. There's no point in having to wait weeks or months to settle a policy that was designed to cover immediate funeral expenses.
4. Premiums ceasing from a set age (not always an option)
Some funeral cover policies stop charging a premium from age 85 but keep the cover in place until a claim is received. This is a worthwhile benefit but can make the cover more expensive.
DISADVANTAGES OF TRADITIONAL FUNERAL COVER
For all the benefits of traditional funeral cover there are some fairly important disadvantages that need to be weighed up when making the decision.
1. Only covered for accidental death for the first 2 years
Because most traditional funeral cover policies accept an applicant without any need to provide health information this presents a big risk to the insurer. They are effectively opening their doors to lots of fairly unwell individuals who wouldn't be able to get cover elsewhere. To reduce the risk this creates the cover is limited to accidental death for the first two years. Usually only a refund of premiums paid is offered if the insured dies from of an illness in the first 2 years. While this reduces the risk of a terminally ill person applying for cover it still leaves the offer open to clients in poor health. The result is that the ‘claims experience’ of a group of funeral cover policies is going to be much higher than for other kinds of life insurance. This leads us to the second major disadvantage.
2. Monthly payments are very high
Because of the increased risk the insurer has no choice but to charge every funeral cover policyholder more for their cover so that they can afford to pay for the much higher number of claims.
3. Inflation destroys value
While $10,000 or $15,000 might be enough to pay for a funeral today it probably won't be enough in 20 years time. Funeral policies always have a fixed premium and sum insured so can become out of date very quickly. The only way to combat this is to take another funeral cover policy at a later date. Not a great option because you're much older then so the cost is much much higher.
But for funeral cover to work for the insurer they still need a large proportion of fairly healthy individuals to apply for cover. It’s these healthy people that make the whole proposition work for the insurance company.
HOW TO REDUCE THE COST
For many people, the option of taking standard life insurance will bring a much better outcome.
Surprisingly, small amounts of standard life cover can be quite easy to get - even for people with a less than perfect health history. What many don’t realise is that having high blood pressure or cholesterol, asthma, hip replacements or many other common health conditions actually make little difference to a life insurance application. It’s this misunderstanding that has sent many older New Zealanders to funeral cover as their solution.
If a person is eligible for standard life cover they can reduce the cost of their cover without losing the benefits. In fact, standard life cover has multiple benefits that can’t all be found in funeral cover policies. For example:
1. Much lower premium
2. Cover for death from all causes from day one - even suicide after 13 months
3. Level premiums throughout life
4. The ability to add in inflation adjustments so that cover is more likely to be enough to pay for the funeral when it’s needed – even though premiums don’t increase
5. The ability to buy higher amounts of cover if required – most funeral policies are limited to $30,000
6. The ability to more easily modify cover as needs change
All of this adds up to a much better proposition for those eligible for cover.
We recommend you contact your adviser (or Vesta Cover) if you have existing funeral cover or are intending to buy some soon. There may be much more cost effective ways to cover final expenses than paying a fortune for funeral cover.