Do pre-paid funeral plans make financial sense?

Oliver Jones
4th November, 2016
Money & Finance

Losing someone close to you is one of the most distressing experiences you are likely to experience in a lifetime. Most of us will want to have the space to come to terms with our loss but sadly for many, the immediate aftermath of a death is usually dominated by sorting our funeral arrangement. Those arrangements also come with high costs, the last thing that you need when you are grieving the death of a loved one. And funerals are expensive: the average cost is now close to £4,000 and is expected to rise by another £1,000 by the end of 2017. The funeral itself is not the only cost that relatives will incur: all the extras including flowers, a memorial and catering, can add more than £2,000 to the final bill. And this is before you consider probate and the implications of inheritance tax. Keeping these matters in mind do pre-paid funeral plans make financial sense? Will they alleviate some of stress?

How do pre-paid funeral plans work?

With funeral cost inflation running at 4-5% per year (way ahead of general inflation) pre-paid funeral plans are designed to lock-in lower prices now so that you can avoid costs that could rise significantly over intervening years – especially important when no one knows how long they have left. Plans are available for both burial and cremation and tend to be available with different levels of coverage – think bronze, silver & gold. Currently (2017) pre-paid funeral plans cost in the region of £3500 to £4500 depending on coverage. You can typically take out a plan from the age of 50 and pay for it in a number of ways – either a single payment or monthly instalments for a period as long as 30 years (although periods over 12 months are likely to have implications for the monthly amount you need to pay). With savings rates so low at the moment pre-paid funeral plans could make great financial sense. More so if you take one out sooner rather than later. It could prove to be the best return on your savings though ironically you won’t live to enjoy it.

What are the alternatives?

Over-50s plans

These policies guarantee a fixed payout when you die and this can be used to put toward the costs of your funeral. However, these plans are not straightforward and you will usually have to make a monthly payment for the rest of your life. If you live a long time, then they can be extremely expensive and mean that the policy pays out much less than you paid in because the final sum is fixed when you take the policy out.

Bear in mind that once you start paying in to one of these plans, you can’t change your mind and get your money back although some may allow it but charge a large fee for this. If you fail to keep up with the repayments, then the plan will be suspended and you will lose what you have already paid in.

Some over-50s plans are linked to inflation so that the final payout keeps pace with the cost of living. Other plans have a final payment on reaching a certain age so these are worth considering if you are in good health and wish to keep costs to a minimum.

Term life insurance

These polices are run over a defined period and will pay out if you die during this time. If you are still alive at the end of the term, then the policy will finish on that date and you will not be entitled to receive a payout.

If you sign up to term life insurance, then you can choose the level of the cover. Level cover keeps the potential payout the same over the term while decreasing cover sees it reduce in line with your mortgage or other large liabilities. Increasing cover will guarantee an increasing payout either against inflation or by a set amount annually.

These premiums can differ considerably depending upon your age and the insurer that you choose – so consider all of your options carefully. Other things to remember are your family’s health history and weather you already suffer from any existing medical conditions which could increase the cost of premiums considerably.

State help

People on low incomes may be eligible for help with the costs of a funeral. The state provides Funeral Payments to help with burial fees, cremation costs and a further £700 towards other expenses which might include the cost for relatives of travelling to a service. But the catch is that the government expects the money to be repaid from the deceased’s estate.