In a statement today (30 August) the FSCS has said this applies whether the plan was purchased by paying a lump sum or by paying a monthly amount to the funeral plan provider.
While funeral plan providers can be regulated by the Financial Conduct Authority, the vast majority choose to use exemptions which mean they are not.
Even if a regulated funeral plan provider were to sell a funeral plan to an individual, this would not be covered by the FSCS because these products are not categorised as a “designated investment” under its compensation rules.
In its statement the FSCS said: “Funeral plan providers rely on insurance companies and investment trusts to meet their obligations to customers.
“In some limited circumstances where the provider of a whole of life insurance policy or provider of a product held within a trust goes bust, FSCS may be able to pay compensation to the provider of the funeral plan or the trustees.
“It would then be for the funeral plan provider or the trustees of the investment fund to decide what to do with any monies that are paid out as a result.”
The FSCS added that, once it pays compensation, it is not responsible for the decisions funeral plan providers or investment fund trustees may make.
James Daley, managing director at Fairer Finance, said: “We're delighted to see FSCS bringing some clarity to where its coverage lies and doesn't lie around funeral plans.
“The fact remains that no funeral plan customers have recourse to FSCS if their plan provider was to become insolvent.
“Yet most people think funeral plans are subject to the same regulation and consumer protection as general insurance products.
“It's commendable that bodies like FSCS are educating customers on any anomalies in consumer protection.”
The FSCS said the Funeral Planning Authority is the self-regulatory body for the vast majority of the funeral planning industry.