Personal-Finance

Choosing the right funeral plan

2016-11-22 10:10

For many South Africans, funeral cover is the first financial product they invest in after opening a bank account. Yet Old Mutual’s general manager for Foundation Market, Thembisa Mapukata, says there is a lack of knowledge around funeral policies in particular and financial products in general, even in more affluent households, due in part to a lack of proper advice, which means people do not receive the best value for money.

“There is a huge need around financial education on funeral cover across the spectrum, not only on the product itself, but also on the value and pricing of the product,” says Mapukata.

This creates an opportunity for funeral policies to play a critical role in overall financial planning. So rather than purchasing funeral cover on an ad hoc basis, spend time understanding the role it plays in your overall financial security, and find ways to consolidate and optimise the cover.

These are the questions you need to ask:

Who are you likely to be responsible for?

Yourself: Funeral cover for you and your direct family members will ensure that the cost of your funeral does not put undue financial pressure on your family when you die.

Your parents: Most individuals will also be expected to contribute to the funeral costs of their parents. Mapukata says that, in some cases, parents may be “overinsured” if their children all take out funeral cover in addition to cover taken by the parents themselves. Ideally, this is a conversation that should take place as a family, but Mapukata says that, unfortunately, due to the taboo nature of talking about death, this is unlikely to happen. At the very least, one should have an idea of what financial responsibility you are likely to incur and make provision accordingly.

Extended family: The same would apply for extended family such as uncles and aunts you may be financially responsible for. You need to decide whether it makes sense to have an additional funeral policy for extended family, or whether this can be provided for through an emergency fund.

How much cover do you need?

“The amount of money likely to be spent on a funeral will be determined by the ambitions of the family, so it will vary – the type of funeral they would like to offer their loved ones determines how much will be spent,” says Mapukata.

An example, he says, is that some cultures require the slaughtering of a cow when an elderly family member dies.

“You need to ensure that you have sufficient money to cover that, and the funeral costs and the rituals that take place afterwards.”

In the case of extended family, you may also find that you will be relied upon to provide some financial support after the death of an adult. For example, there may be immediate bills or school fees to pay for. It would be useful to have a contingency plan for these events rather than trying to meet them out of your own budget or credit facilities when the death occurs.

All these factors need to be considered, as well as how these costs will be shared by the family, when taking out a policy.

Do you have too many policies?

Multiple policies add to the overall cost as each one will carry an administration fee as well as a commission fee. One of the reasons people end up with multiple funeral policies is that they augment existing policies during their working life. Mapukata says that when you start working, you may take out a basic policy for a small monthly premium, but as you earn more and take on more responsibility, including starting a family, your needs will expand.

Rather than just buying more policies, look at reviewing your existing policy and increasing the cover.

“It is worth speaking to an accredited financial adviser who can look at your portfolio of needs and see if they can construct a funeral policy portfolio that is cost effective based on what is available on the market,” says Mapukata, who adds that there are funeral policies that allow for flexibility, including increasing cover and number of dependants.

Is there a limit to how much cover you can have?

Individual insurance companies do limit the amount of cover provided per life covered in a funeral policy. For example, Old Mutual has maximum cover of R70 000 per person, or R30 000 per policy if it’s an assistance policy (this is usually linked to a funeral parlour).

That does not prevent you from taking out a policy with another insurer if you feel you need more cover. However, this is not necessarily a cost-effective strategy because funeral products are not underwritten, so they limit the benefit amount. There are, however, products that have limited underwriting (medical questions with no testing) that provide higher benefits. For example, Old Mutual offers an up to R700 000 benefit amount for limited underwriting.

Make sure you are covered by a reputable provider

Typically, more affluent households have access to formal institutions that are governed by legislation and have clear rules and service levels they are required to meet. There is also recourse for consumers if these conditions are not met.

In the more informal funeral market, there are arrangements provided through burial societies and funeral parlours, and it is a requirement that these providers are registered with the Financial Services Board (FSB). In the instance that these providers are not registered, it is difficult to ensure that customers are treated fairly.

Funeral parlours or burial societies offer products specifically for burial and should be underwritten by a reputable financial institution to guarantee that the claim will be honoured, thereby giving the customer peace of mind.

In some cases, however, these entities do not underwrite with an insurer and rely on payments from members to meet the funeral costs. This is illegal and significantly increases the risk of the claim not being paid out due to the unavailability of funds, especially if there are multiple claims from that particular entity.

Old Mutual’s Thembisa Mapukata says there are also incidences where funeral parlours fraudulently sell cover they claim is underwritten.

“People need to ensure that the funeral parlour is an accredited service provider by asking for the financial services provider number and declaration from the insurer that this funeral parlour is underwritten. All brochures and documents should include the details of the underwriter, and the FSB registration certificate must be visible in the offices.”

Points to remember

A funeral parlour that offers funeral cover must issue a certificate of membership from the underwriting company as confirmation of membership, and this should include details of the benefits and premium amount.

Know what your rights are and ensure you are dealing with a registered company that is underwritten and treats you fairly.

Familiarise yourself with the underwriter complaints process, as well as the contact details of the ombudsman, for dispute resolution purposes.

In the case of a burial society, make sure the society has a constitution that declares its terms of operation. As the policyholder, you must be clear on the terms of your contract and honour your obligations

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September 23 2018