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Category Life Insurance

Funeral policies are designed for a purpose

20 March 2008 Medscheme Financial Services

Although funeral policies are universally accepted as necessary in South African culture, they do not always achieve the desired result says Lisa Gibbon (pictured right), Divisional Managing Director at Medscheme Financial Services.

“A funeral policy is designed to pay a prompt, tax-free free lump sum on the death of a loved one to alleviate the sudden financial burden caused by funeral costs,” says Gibbon.

“A good funeral plan must therefore ensure that monthly premiums are affordable, that payout is prompt, that the cover is sufficient to cover funeral costs and that the benefits are used to ease the financial burden of the family.”

Unfortunately, this is not always the case.

“Underinsurance is a common problem. Many people only realise when the benefits are paid out that there are not enough funds to cover burial costs - which often exceed R 10 000,” says Gibbon.

Conversely, it is not unusual for families to be over-insured by having a number of funeral policies covering the same person through traditional burial societies, stockvels, and funeral companies.

This practice is usually based on the premise that the deceased should have the most memorable funeral and that everything else is of lesser importance.

“While this mindset is understandable, being over-insured simply means that the policyholder is investing in death as opposed to investing in life – often at the expense of other very necessary financial planning instruments that provide for education, life cover and retirement, “ explains Gibbons.

The Life Office Association (LOA) has, in the last few years introduced measures to limit the amount of funeral cover that can be obtained on a policy - aimed principally at preventing cases of fraud where critically ill people are insured so that monies can be obtained when the patient dies.

To some extent, these measures have succeeded in curbing these practices but it is still common to find that relatively little is spent on the funeral while the bulk of the pay out is used to repay debt or other purchases.

While it is the up to the policyholder (as the premium payer) to use the payout as he or she deems fit, the question is whether or not it is unethical to purchase a funeral policy and use the payout for other purposes.

A challenge that insurance companies and regulatory bodies face is if and how they should play a role in ensuring that the payout is used for what it was intended.

It has been suggested that the industry should introduce accountability measures for the policyholder.

However, this would involve additional (and costly) administration for the industry which would increase the premiums and possibly to a migration to less formal investments such as burial societies and stockvels.

“The key challenge is ensuring that cover obtained is sufficient for a funeral.

It is about understanding one’s obligation when taking a policy, meeting these obligations and making sure that, overall, one’s financial plans are intact – the ultimate solution is proper financial planning,” concludes Gibbon.

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