You see them advertised everywhere it seems, and as it turns out these policies might just be one off the biggest money-wasters for consumers in the insurance world.
It is understandable that some people don't want their loved ones to have to pay for their funeral but discuss it with them first. Some loved ones might be happy to pay when the time comes and prefer you enjoyed the money you'd be spending in premiums.
And if you already have a life insurance policy you might find you already have "funeral cover" or can convert a portion of it at little or no cost.
Consumer NZ looked into these in 2016 and this is what they had to say:
“Funeral insurance marketing plays on people’s fears about being a burden on their families. But it is easy to end up paying thousands more in premiums that the insurance policy will pay out” according to Sue Chetwin. Consumer NZ reviewed 10 policies offering $10,000 funeral cover for a 64-year-old and the review found that by age 84 the amount paid in premiums exceeded the $10,000 cover with most policies. In some case the insured person would have paid twice what they were entitled to be paid out.
Remember that if you stop paying the premiums your policy will lapse and you'll get nothing, irrespective of how much you've paid in. There are no refunds. Some policies pay out the amount insured - or whatever you've paid in premiums - whichever is higher. But you have to keep paying the premiums until you die. If you have a policy for $10,000 and you've already paid $10,000 or more in premiums if you stop you will get nothing. You have to keep paying those premiums to get anything back.
So it turns out that this type of life insurance just might be one of the most expensive ways to pay for a funeral if you end up having average life expectancy.
There are some circumstances where funeral plans might make some sense, such as when there is a known family history or something less than average life expectancy and you already have pre-existing conditions which make it difficult to get regular life insurance cover. But then, there are other types of policies available from a few companies where you can get cover regardless of pre-existing health conditions and for far higher amounts of insurance than the typical funeral plan. Generally these policies have some conditions attached, but they are a reasonable balancing of the risk and the benefit.
For instance, you can get policies which would provide up to $50,000 in life cover regardless of health, but they would only pay out for death by accident inside the next 2 or 3 years – so death from illnesses aren’t covered for that period of time. But once that “qualification period” has passed they become full cover policies and will pay out for death from any cause – including illnesses.
Interestingly, some of the “funeral plans” for far lower sums insured have the same restrictions.
If you are tempted by some slick advertising for a final expenses policy because a semi-celebrity or sports personality is endorsing it on television, just look twice at the actual wording. Better yet, get some advice before signing anything.
The difference that advice from a professional can make if you are ever considering this is pretty straight forward:
- Get better cover which is more likely to pay out for the things that actually are more likely to happen
- Get MORE cover for the same or less cost
- Look at a number of options and select the best product based on your needs and budget
Caveat emptor! Buyer Beware when it comes to buying Funeral Plans from great marketing machines….
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