Funeral insurance: The amount paid out could be less than the cost

Picture of a funeral director with an urn
Some people may be better off saving for the cost of their funeral. Photo credit: Getty.

Advertisements for funeral insurance are popping up everywhere, but is up to $30,000 enough and would people be better off saving for this inevitable cost?

Facebook ads for funeral cover promote "cover in minutes" with "no health questions," typically with the catch that, initially, only death by accident is covered.  

In theory, 50-year-olds who are willing to take a punt that they'll live to at least the national average and able to set aside $15 per week can bank on better value through their savings.  

But as final wishes play a large part in how much is needed for the final send-off, pre-planning will largely determine whether funeral insurance is the right way to go.

Gail Costa, chief executive of Cigna New Zealand, said that funeral cover is suited to people aged 50 and above, to help them plan ahead for their funeral, freeing the family from having to pay for it themselves.

Unlike standard life cover policies, to apply, customers don't have to answer any lifestyle or medical questions, the costs ('premiums') don't increase with age and under Cigna's policy, if people make it to 90, they no longer need to pay.  

But with cover from as little as $5000 ($3000 elsewhere), the onus is on customers to decide whether the cover provides value and would be enough to pay for the funeral they have in mind.    

"We advise customers to keep an eye on their policy [to] ensure they maintain the cover [amount that] they can afford and is right for their needs.

"A payout could be more or less than [the amount] paid in premiums," Costa said.

A spokesperson for the Financial Markets Authority (FMA) said that as the premiums may be more than the cover amount, funeral cover is identified as a low-value product.

"Guaranteed acceptance" is often promoted [and] certain exclusions apply.

"There is only accidental death cover [in] the first two years, or in some cases no cover at all, or permanent exclusions for known conditions," the spokesperson said.

Putting a price on the cost of a funeral

A spokesperson for a well-known funeral company told Newshub that burials are declining as many people have moved away from traditional funerals, with the average cost of a funeral sitting between $9000 to $11000. 

Direct cremations, where ashes are returned to loved ones without a formal funeral are a growing trend and can cost anywhere from $2000, whereas the cost of a burial plot alone ranges from $3000 to $7000 plus.

While there's wide variance on costs of a funeral, there's also a cost to not having one.

"You have to have the right funeral for your family.

"The grieving process is different for every person, (not necessarily from A-to-B) and a formal service gives people a time and place to grieve."  

To help people make what can be the worst day of their families' lives that much better, many funeral companies provide a free service to pre-plan (and pre-pay), the funeral.  

"[Planning] helps to ensure that people make informed choices, that they get the service they require and also takes stress away from the family," the spokesperson said.

Cost of $20,000 funeral cover could be saved within 25 years

For a $20,000 funeral policy with Cigna, a 50-year old female non-smoker could expect to pay $30.02 per fortnight.  

Covered only for death by accident in the first two years, the customer could part with up to $1561.04 and only have their funeral paid for if their death was accidental, e.g. by car or a fall.

The Department of Internal Affairs confirmed age 78.8 as the average age at death for Kiwi females over the last five years (males at age 73.9).   Assuming that death occurs at this age, the amount of money paid in premiums is estimated to reach $20,000 between the ages of 75 and 76, supporting the theory that by saving the money themselves, people could come out better off.   

In contrast to funeral insurance, life insurance can be more suited to younger people with wider needs. Freeholding the family home, debt clean-up, home help, education costs and a financial recovery period can all be included and many life policies include an in-built funeral benefit of up to $15,000.

According to online life insurance calculator 'Life Direct', a 50-year old male non-smoker wanting $200,000 of life cover could pay between $25 and $29 per month ($21 to $23 per month for a female) on a stepped premium, which unlike funeral cover, means that the cost increases each year with age.

Many life insurance policies exclude suicide within the first 13 months and as personal health information is provided and assessed by the insurance company upfront, any existing health conditions may be excluded, or require an extra cost (called a 'loading'), paid as part of the premium.

As the cost of funeral insurance in the long-term can be more expensive than saving the money, people who have easy access to savings, liquid assets and/or an ongoing income are likely to find a more cost-effective alternative. 

For younger people with dependent children and/or a mortgage and other financial responsibilities, funeral cover can be included as part of the life insurance, providing wider cover for the cost.

Older people who don't like paperwork, are unlikely to save and/or who don't want their families to bear the burden of the upfront cost while waiting for their estate to be divided may decide that funeral insurance is the quickest, easiest way to get funds in place.  

Pre-planning a funeral makes things easier down the track, providing a place for loved ones to gather and grieve without worrying about how they'll fork out for the cost.

Whether funded by savings or other assets, funeral insurance, life insurance or a combination, as with writing a will, the most important thing from a money perspective is to put a plan in-place.