Funeral cover is not a nice-to-have, but it’s essential if you do not want to leave family members scrambling for cash to settle substantial funeral costs when you die. It has been reported that funeral costs over the past 18 months have increased by as much as 25% since Covid-19 hit South African shores and continue to increase.

Undertakers are hiring more workers to cope with the rise in deaths and funeral parlours have increased their prices for both cremations and burials, due to extra Covid-related expenses such as sanitising products and personal protective equipment (PPE), plus the increases in cemetery and cremation charges by municipalities.

The cost of a funeral ranges between R10 000 and R100 000 meaning that the send off of a loved one is an expensive business.

“As a method of mitigating loss and managing the risks to our lives and impact on families, funeral and life insurance play vital roles in stepping in to assist families to cope financially after the death of a policyholder,” says Yazeed Adams, MiWayLife legal, risk and compliance manager.

“Funeral cover is easy to take up, but its uses are often misunderstood and conflated with a life insurance policy. The two policy types both provide payment in respect of the same insurable event – being death – but should serve different purposes in your financial plan, whether you self-manage or have a broker.

“During 2020 there was a 43% increase in the number of death claims across the main long-term insurance products covering life as a primary benefit – funeral, individual life, group life and credit life. Considering the severity of South Africa’s 2021 experience, we could see another increase in the number of death claims reported across the long-term insurance industry in 2021,” says Adams.

“One needs to assess your personal financial circumstances,” says Subash Chatrooghoon, executive financial advisor with Insurance and Wealth Creation Professionals. “Most funeral plans have the option to add spouse and children, as well as extended family members such as parents and parents-in-law. However, the more members are added to a plan, the higher the premium.”

Adams says that when getting insights from clients, the main reason stated for taking out insurance that pays out upon death is that when a person dies, they don’t want their family to struggle financially. He says that when probed further, it is often discovered that a person already has one or more funeral policies to take care of funeral expenses. He describes the reason behind this is a lack of understanding about which insurance product should be used to meet which objective.

“A funeral policy will not go far in ensuring your family is financially stable, and if you have many funeral policies there is a very strong likelihood that you’re paying a lot more in premiums than you would pay to realise a larger pay out under a life insurance policy.

“Historically, there have been challenges in getting access to financial products and guidance for South Africans falling outside of the target market or geographies which intermediaries and brokers typically engage in. The knowledge and understanding of available products and getting sound financial education or advice was therefore limited.”

Duplication of cover

A mix of traditional and cultural expectation, limited information, lower barriers to entry, and perceived lower costs provided a good platform for the South African funeral insurance industry to flourish to the point of over saturation or over-insurance. The Financial Sector Conduct Authority (FSCA) recognised the over-selling and over-pricing of funeral policies in the market.

As a result, it instituted a R100 000 cap on the quantum of funeral cover a person may have on a policy – which happens to be the upper end of what a funeral typically costs. Recognising the impact of Covid-19 on mortality rates and funeral policy claims, the FSCA issued a warning to insurers about implementing exorbitant increases in funeral cover premiums.

“Over-insurance or duplication of cover is prevented by the caps implemented by the FSCA,” says Chatrooghoon, "whether provided by micro-insurers or traditional insurers, depending upon their respective licence agreements.”

Chatrooghoon describes the potential pitfalls of funeral cover by saying that depending on the type of licence the product provider has, if caps are exceeded the benefits may be aggregated. “If you have multiple funeral policies, it is important you are transparent with your product providers to circumvent over-insurance.”

 Funeral policies are not always suitable to the circumstances or intentions of the policyholder. While easy to purchase with a promise to assist with funeral expenses, the question to ask is whether funeral policy products contain features most appropriate for long-term responsibilities; for family members to sustain themselves, for children to attend school and university and provide for parents who rely on the beneficiary’s monthly contribution to their income.

“Often the answer is no,” continues Adams.  ”That would be the role of life or other long-term insurance products.”

Recognising the need to reform the funeral insurance market, the regulator introduced new laws on funeral products to reduce the risks of practices that are unfair or predatory to policyholders. This led to the need for life insurance, not as a replacement for funeral cover, but rather to complement it for long-term responsibilities.

However, Adams is of the view that through educating prospective policy holders, better financial decisions can be made. An example is having a single life insurance policy with an embedded or ancillary funeral benefit that meets both these needs – in other words, funding a funeral and leaving wealth as a legacy. This means that policyholders are able to take up a higher insured amount – above  R100 000 – and families are still able to access funds within 48 hours to arrange a funeral, with the remainder of the money paid out under the life insurance benefit.

Lifestyle information

All insurance works on the idea of a shared risk pool. An important element to this process is measuring the risk so that at no point will the insurance book become insolvent or run out of money to pay claims. The more an insurer knows about the risk posed by the people in the pool, the better it can manage the pool to the benefit of individual insured lives and their beneficiaries. In the case of life insurance the assessment of risk is typically more detailed than with funeral insurance.

Life insurance premiums are tailored to your unique circumstances, so it is important to answer all the questions asked about your medical history and lifestyle truthfully. This is what generally determines the price of life insurance premiums. Relative to funeral cover, a life insurance premium will normally be more value for money, and without the R100 000 cap.

The things to consider when you’re in the market for funeral cover include assessing the requirements and expenses of the burial versus the need for the family to have funds to sustain them without a breadwinner or contributor to the household income.

Then there is the perceived cost of products. Often the monthly premium of funeral cover is lower than life insurance, but life insurance pays out more, especially since the cap of R100 000 on funeral policies instituted by the FSCA.

“The Covid-19 pandemic has certainly highlighted the necessity of having adequate emergency financial provisions. With many individuals experiencing financial challenges through reduced income due to lockdowns, having to pay for a funeral is added financial stress. This stress can be mitigated by having the right types of products and a detailed financial plan in place,” concludes Chatrooghoon.

This article was first published in the Daily Maverick