Why do I need a funeral insurance plan?

Capitec’s Brent Moore explains how a funeral insurance policy works:

Insurance is a legally binding contractual mechanism that helps a person to protect themselves against financial loss.

It is a way of managing risk to your monthly cash flow. For a relatively small monthly premium, you can protect yourself against a comparatively large lump-sum payment.

You as a policyholder enter into a policy contract with an insurer (also referred to as underwriter) and agree to a monthly risk premium in return for a lump-sum cover amount.

Your monthly premium and related cover amount are determined by legislation, as well as the risk appetite and experience of the insurer.

It helps a person with responsibilities to manage their financial lives within their monthly budget so that they do not have to incur debt or sell assets to fulfil their financial obligations due to unforeseen events.

The only challenge to saving (in a bank account) is that the timing, frequency and magnitude of loss is often unknown, so the question to ask is whether you have saved enough to cover your unforeseen financial obligations.

When you consider buying funeral insurance, you should keep the following in mind:

Understand the role it plays for your overall financial security

Having a funeral plan in place is important to cushion yourself financially during a tough time. While a funeral plan cannot ease the pain of your loss, it can help to make the path ahead just a little bit easier. Making financial plans to be able to afford your own funeral, or that of your loved ones, is crucial to ease financial stress during a difficult time of grief.

Who are you likely to be responsible for?

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.

Most individuals will also be expected to contribute to the funeral costs of their parents.

The same would apply for extended family such as uncles and aunts, grandparents, and nieces and nephews you may be financially responsible for.

How much cover do you need?

The amount of money you are likely to spend on a funeral will be determined by the ambitions of the family – the type of funeral you would like to offer your loved ones determines how much you will spend. In the case of extended family, you may also find that you will be relied on to provide some financial support after the death of an adult.

How to choose a policy

As a client, you need to have a clear understanding of your needs. In this way, you will focus on buying what you want, rather than being sold what a service provider has in their product toolbox.

Given your understanding of the above, look at value for money – how much will it cost you (premium) and for what level of benefit (cover amount)? Try to work out cover/cost to figure out the rate for comparison purposes.

Stay focused on your needs and don’t let the marketing of product features distract you. Do you want cover to pay for your funeral right now, or do you want deferred benefits such as cash back, groceries or a tombstone a year after the funeral? Find out how practical it is to claim on these features, and how material these features are to the overall benefits of the product. If you want groceries to help provide for the funeral, know that you can pay for this with your cover amount wherever you decide to shop and you do not need to be dependent on vouchers linked to a specific store that are also linked to certain products for a limited time.

Know what you pay and know what you get. All product benefits are costed into the premium and, sadly, are sometimes based on the fact that it is very difficult to claim on some of the benefits. Products need to be simple and transparent, and allow you to be in control of your purchase.

• This series is reported by City Press and paid for by Capitec