Life assurance Vs. Pre-paid funeral plans - Which is best?

We are quite often asked this very question by our clients, and so we thought we'd write a brief summary on the pros and cons of either option. Let's start by looking at life assurance.

Life Assurance (Over 50's Plans)

Life assurance (quite often incorrectly referred to as insurance; one insures against an event that may occur, such as a car crash or house fire; one assures against an event that will occur, such as death) provides a lump sum upon the death of the policy holder, in return for monthly premiums being paid. Most Over 50's Plans are taken out with the premise of the lump sum payout covering the deceased's funeral. The monthly premium will depend on the age of the policy holder, the amount of cash benefit required, and sometimes their general health - although assurance policies known as Over 50's Plans famously advertise that there is "no medical and guaranteed acceptance".

Advantages of Over 50's Plans

The main benefits of these plans is the fact that they are accessible to pretty much everyone; and that the sum payable on death is known from the outset of the policy.

Disadvantages of Over 50's Plans

The drawbacks of Over 50's Plans are that most policies only provide accidental death cover in the first two years, with "full cover" (i.e. every other cause of death other than accidental) only being available from the start of year 3. Most policies require that the policy holder makes payments from the start of the policy until they reach 90, or until death, whichever happens first, and this often results in policy holders paying far more in premiums than the value of their lump sum. Missed payments can result in the cancellation of the policy, and in this case the policy holder loses all premiums paid to that point, as well as any benefit.

Perhaps the biggest drawback, is that of inflation. Inflation reduces the buying power of the lump sum, and so it may not cover the full cost of the deceased's funeral. Nationally, the cost of funerals rose by 122% between 2004-2017, rendering many thousands of Over 50's Plans ineffective when it comes to the ability to cover the costs of a funeral, resulting in family members being relied upon to help out financially.

Pre-paid Funeral Plans

A pre-paid funeral plan does exactly what it says on the tin: it gives the plan holder the exact funeral services they have paid for, irrespective of the elapsed time between the plan being taken out and the plan holder's death. There are numerous companies in the market, but we would recommend finding a plan provider which is a member of the Funeral Planning Authority, such as Dignity or Safe Hands Funeral Plans.

Plan holders can choose to pay for their plan in one payment, or choose to pay over affordable monthly instalments, although there is often an administration charge when paying in instalments. The plan holder's payment is held in a trust, which is entirely separate from the provider's operating company, and this ensures that funds are managed correctly in order to safe-guard the plan holder.

Advantages of Pre-paid Funeral Plans

Because the plan holder is buying the services of the funeral director in advance, it is effectively inflation-proofed. The plan will be honoured in full, irrespective of the amount the plan holder paid or the current cost of the equivalent services. This is a massive comfort to plan holders as they know that their children will not be hit with an unexpected expense. It also ensures the plan holder's funeral wishes are carried out exactly as they would like, as these can be noted down at the time of the plan commencing.

The ability to spread the cost of a funeral plan makes them affordable in the short-term, and the policy holder will never pay more than the value of their plan - unlike Over 50's Plans where you can end up paying far more than the value of the benefit received. Some providers, such as Dignity, will also allow plan holders to miss payments without automatically cancelling their plan, which is a huge bonus compared to Over 50's Plans. Furthermore, should a plan holder who is paying on instalments pass away before their plan is paid off, some providers, such as Dignity or Co-op, will automatically cover the outstanding balance, giving peace of mind that the deceased's family will be further protected from unexpected expenses.

A funeral plan is usually transferable to cover another family member if required, for example to cover the plan holder's spouse, or one of their own children or grandchildren, if they were to have died suddenly - again, this is something not available with an Over 50's policy.

Disadvantages of Pre-paid Funeral Plans

Because the plan holder has purchased a funeral, there is no option to take a cash equivalent at death.

The differences between providers and plans is often quite subtle, however, it is essential for the plan holder to understand exactly what is, and what is not, included with their purchased plan. Some very basic plans for example, only allow funerals during restricted times; or do not include costs known as disbursements - costs such as doctor's fees, the actual cost of the cremation, or the fees charged by clergy or other celebrants for conducting the funeral service.

Winner - Pre-paid funeral plans

For pure funeral planning, choosing a pre-paid plan from a reputable provider such as Dignity or Safe Hands Funeral Plans is always the best bet. Inflation-proof pricing, guaranteed service levels, ability to transfer the plan to other family members and the option to spread the cost are all benefits that no Over 50's Plan can offer.

Although there is a place for life assurance, it should not be relied solely upon to pay for a funeral; there are too many variables that make it a less attractive option these days.

For a personalised evaluation of your circumstances, call our funeral planning experts on 01925 321 231, or email enquiries@elliottgeorge-ep.com.