Should You Buy A Prepaid Funeral Plan?

With funeral costs rising to an all-time high, an estimated half a million people have taken out a funeral plan to cover the expense. If you’re considering joining these policyholders, here are the key facts about funeral plans…

Over the past twenty years, the cost of an average funeral has risen over one thousand times above the rate of inflation. Mintel’s Funeral Business Reports demonstrate that between 1988 and 2006, the average funeral cost soared from £716 to £3,456. Unsurprisingly, this has led to more and more people thinking ahead, and taking out funeral plans to ensure their loved ones are not burdened with large bills after their deaths.


Why have funeral costs increased?

There are a number of reasons for this steep hike in average funeral costs. Crematorium costs have increased sharply, as a result of governmental commitment to reducing air pollution. Crematoriums are now required to reduce the extent of their mercury emissions, which can only be achieved through implementing scrubbing mechanisms. These mechanisms are costly, raising the overall crematorium fees.

In addition, local councils are no longer offering ‘on the rates’ subsidised plots for burials. As everything is priced commercially, fees have gradually increased. Finally, the fees for doctors relating to funeral activities have been affected by the British Medical Association’s decision to remove the tariffs which were previously applicable. Together, these factors have led to the overall average price of funerals increasing, to the extent that many providers offering funeral plans have been forced to reduce the overall benefits packages offered to plan holders.


What assistance may people expect?

The Government offers little financial assistance for funeral costs, unless the bereaved are on a low-income and pass certain eligibility criteria. Expenses covered include the burial or cremation fees, doctor's fees, and £700 towards additional expenditure on flowers, travel and coffin. If the deceased had a funeral plan in place, the Government will only assist for any items not covered within that plan. Any financial assistance provided for funeral expenses is expected to be repaid from the deceased’s estate.


Funeral plans: As good as they initially appear?

While any plan which provides additional support with funeral costs sounds like a sensible idea, consumers sometimes find that the benefits are outweighed by the pitfalls. Even plans which initially appear to offer comprehensive cover for all costs can be underwritten with small print which restricts payouts according to certain conditions of cover. Unless plan holders research their products thoroughly prior to making an informed decision, they may find that coverage is not provided to the degree they assumed. As the overall cost of funerals rises, so more and more plan providers are reluctant to provide comprehensive guarantees that all third-party costs will be covered, in the event of the plan-holders death.


Types of plan

There are two main funeral plans available: Whole-of-Life, and Pre-paid. It rather depends upon the individual's circumstances and requirements as to which plan may be most appropriate to meet their needs. Considerations include age, financial situation, wishes, familial circumstances and health.


Whole-of-Life policies

The Whole-of-Life plan provides the customer with an alternative to term insurance, which pays out an agreed amount upon death. These policies can be taken out at any age from sixteen upwards. However, the most common policies are specifically marketed for over 50s, as lifelong protection. Writing life insurance in trust can also assist in speeding up payouts from the policy, bypassing probate and freeing funds for funeral costs.

The downside to Whole-of-Life plans is that if you live for a longer period than expected when you initially took out the policy, yet continue to pay in, you’ll receive less upon your death than you paid for the plan.


Pre-Paid plans

Pre-Paid plans operate differently, in that the policyholder purchases a funeral package either with a single lump sum, or spreading the cost over a series of payments. These plans are often marketed as freezing the cost of your funeral at the time of purchase, regardless as to how long the policyholder lives having taken out the plan. The downside for Pre-Paid funeral plans is that many do not cover the entire funeral cost including plots, the wake, Funeral Director services or other expenses. This may mean that people who purchase the plan in good faith are not aware that their family may be liable for additional expenditure.

While both plans have positive and negative elements, the rising costs of funeral expenses can still make funeral planning a sensible decision.


Regulations covering providers

As the Financial Services Authority currently has no direct regulation over pre-paid plans, there is no protection offered against insurance-based schemes which result in policy owners getting back less than they invested. However, providers offering pre-paid plans are governed by the Funeral Planning Authority (FPA). This regulator stipulates that all providers must retain monies within a trust fund, and have independent trustees and an overall fund manager. This requirement ensures that all money is prudently invested in order to meet the future funeral costs incurred by plan holders.


Things to watch out for

The bottom line with any funeral plan is to make sure that you read all of the small print. Many policies which initially appear favourable have various clauses which could result in your family not receiving the benefits which you originally intended when you took out the plan. For example, if a trust structure is not in place with the provider of choice, individuals could lose all monies invested in the plan, should their provider experience financial difficulties.


It's important to ask a series of questions of your plan providers, to ensure that the policy will meet all of your requirements. For example, what happens if the provider goes out of business? Is the provider regulated by the FPA? What are the implications should you die abroad? What would happen in the event of outstanding payments on the plan should you die? By researching all the available options for plans, you’ll be assured that you have a suitable funeral plan in place, placing one less burden on your family at a very difficult time.