Inflation-busting increases in the cost of funerals are leading more people to explore ways to cover these future expenses. Although not normally a mainstream area of financial advice, proposals to regulate funeral plans, coupled with the variety of planning options available, mean there are chances for advisers to get involved.
Funerals are certainly expensive. The average cost of a basic funeral is £4,078 according to SunLife’s Cost of Dying Report 2017, with discretionary extras such as the memorial, flowers and the wake adding a further £1,928 to the average bill.
Increases in these costs are particularly concerning. The report found that the cost of a basic funeral had increased by 4.7 per cent over the past year, and by 112 per cent since SunLife started tracking prices in 2004.
Prepaid plans
Given these costs, there are plenty of different products available to help consumers plan ahead. Funeral plans are available to guarantee that future costs are covered, regardless of how long the policyholder lives and how much prices increase.
These are available from insurance companies such as SunLife and Royal London, but also directly from funeral directors and other intermediaries. Although some of these plans operate on a monthly premium basis, with the option to be paid up at the end of a set term or age, those offered through funeral directors also accept single payments or a deposit followed by 12 monthly instalments.
As examples of the costs, a 65-year-old taking out a plan with Royal London would pay £39.82 a month for a cremation plan; £41.26 for a burial plan; and £17.41 for a direct cremation plan, which excludes a traditional funeral service. Premiums would cease at the plan anniversary following their 90th birthday.
Opting for a plan from a funeral director gives more options on payment. For instance, one of the leading providers, Golden Charter, offers a range of four plans. Single payments vary from £2,895 to £4,099 depending on the type of funeral required. Monthly premiums are also affected by the length of the term selected. For example, the company’s Standard plan costs £16.45 a month over a 30-year term, rising to £149.64 a month for a two-year term.
Insurance options
Life insurance, and over-50s plans in particular, are also frequently marketed as providing cover for funerals. For example, Royal London’s over-50s plan has premiums starting from as little as £3.95 a month, which would provide a 50-year-old with a sum insured of £1,098.
To achieve a payout closer to the amount required to cover average funeral costs, a premium of £14 a month would give a 50-year-old an insured sum of £4,958. As with the insurer’s funeral plan, premiums cease at the plan anniversary following the policyholder’s 90th birthday.
Whether opting for an over-50s plan with guaranteed acceptance, or a fully underwritten whole of life plan, Ian Smart, product architect at Royal London, says there is a key difference between these and the prepaid plans. “Unlike the prepaid plans that guarantee to cover the funeral costs, life insurance pays out a fixed amount,” he explains. “This means cover needs to be reviewed on a regular basis to ensure it keeps pace with funeral costs.”
Policyholders also need to make sure a life insurance policy is written in trust. This means that the sum insured will go straight to the beneficiary rather than fall into the deceased’s estate.
Payment pledge
Complications can arise when policies are not written in trust, as Rachael Griffin, head of trusts and technical solutions at Old Mutual Wealth, explains: “Rather than being able to pay the funeral director with the proceeds of the life insurance, the family would have to wait until probate is granted before they can access the money. This can take months, even years, especially where someone’s circumstances are complicated.”
Some insurers have always taken a more understanding approach to this. For instance, Aviva offers to advance the funeral costs, while Scottish Widows can advance up to £50,000, even where there is no will in place.
However, in 2016 the Protection Distributors Group took steps to make insurers’ approaches more uniform. Through its funeral payment pledge insurers must proactively offer the family up to £5,000 at claim stage so they can meet the costs of the funeral.
Most insurers have subsequently signed up to the pledge, with some offering to advance higher amounts. Royal London announced in April that anyone submitting a life insurance claim through its intermediary arm would be eligible for a payment of up to £10,000 towards the cost of a funeral, where the proceeds of the policy are delayed by probate.
Tougher regulation
Another key difference between the prepaid products and those that incorporate insurance is consumer protection. While the insurance company plans are covered by the Financial Services Compensation Scheme, prepaid options fall under a self-regulatory framework overseen by the Funeral Planning Authority (FPA).
This difference in consumer protection, coupled with incidents of sharp sales tactics in the unregulated part of the market, led the government to launch a consultation into the regulation of prepaid funeral plans at the beginning of June.
The consultation calls for more robust regulation, stating that the current self-regulatory framework is insufficient to ensure the fair treatment of consumers. In particular, it proposes bringing the market under the supervision of the FCA, pointing to the fact that the FPA does not have the power to prevent prepaid funeral plan providers from trading. In addition, while it has a code of practice for members, this is not legally binding.
The consultation closes at the beginning of August, with the government expected to develop a new regulatory framework shortly afterwards. This announcement has been welcomed by the market. Suzanne Grahame, chief executive at funeral plan provider Golden Charter, says it will help to increase security for the individual while also enhancing the reputation of the industry. “The key thing I would like to see is a move to a mandatory regime that everyone is compelled to follow,” she adds.
“We believe this is more appropriate through the FPA: it has been designed to deal with prepaid products and it will be relatively quick and easy to implement the necessary framework across the industry.”
Ms Grahame also argues that the nature of a prepaid plan sets it apart from other financial services products. “When someone takes out a prepaid plan they are paying for a defined funeral. There is no investment risk: it is more like buying a voucher,” she adds.
With any shift in regulation, striking the right balance between consumer protection and choice can be tricky. Given the large number of prepaid plans that are sold through funeral directors, the introduction of more robust FCA regulation could potentially be a disadvantage to some consumers, significantly reducing the choice of products and distribution channels and potentially pushing up costs.
Advice opportunities
Whichever route the government takes, the introduction of appropriate regulation across the funeral plan market should also help advisers to discuss these products with their clients. “Funeral plans should be considered as part of a holistic financial planning review,” says Ms Griffin. “An adviser can help a client determine which option is most appropriate when it comes to planning for the costs associated with a funeral.”
With so many different options available for funding future funeral costs, the government’s decision to consult on tougher regulation for the prepaid plan sector is very welcome.
As well as offering greater protection to consumers wishing to plan ahead for these ever-increasing costs, it will give advisers more confidence to include these types of products within their client recommendations.
BIG NUMBERS
£4,078
Average cost of a basic funeral(SunLife, Cost of Dying Report 2017)
£5,951
Cost of the average funeral in the most expensive place to die – London (SunLife)
70.6%
Increase in the cost of a basic funeral over the past decade (SunLife)
£2bn+
Size of the UK funeral market(Competition and Markets Authority)
597,000
Number of reported deaths in the UK in 2016 (ONS)
