Your Money and careers writer for the NZ Herald

Diana Clement: Weighing options to pay for your send-off

Funeral plans, trusts and insurance are popular ways to provide funds

A funeral has to be paid for often before life insurance pays out or investments are realised. Photo / Thinkstock
A funeral has to be paid for often before life insurance pays out or investments are realised. Photo / Thinkstock

Have you thought about your funeral? Does your family have thousands of dollars on hand at short notice to pay for a befitting send-off when you die?

Most funerals cost between $3,000 and $10,000. The problem is that when you die, relatives and loved ones need to pay for the funeral - often before your life insurance pays out, your house can be sold, or other investments realised.

There are a number of different ways to pay for a funeral. The most obvious one is to set money aside for it. Funeral insurance is also popular. Other methods include common old life insurance, funeral director plans and funeral trusts.

Funeral insurance first. If you watch TV you will have seen flash adverts offering funeral plans. "For just a few dollars a week ... (and so on)", your family can bury or cremate you with no financial worries.

For a monthly premium from the day the policy is taken out until the day you die, these policies cover individuals, couples, or families for a fixed sum of money when they die.

They pay out to a nominated beneficiary within days of death.

How much does it cost? I did some calculations on Cigna's website and $7000 cover for a 58-year-old non-smoking female would cost $30.72 a month. A couple in which the female was 58 and the male 63 would pay $60.10 a month. Interestingly a lesbian couple of the same ages would pay $53.84 a month, but two males in a relationship would pay $64.46. That's because females live longer.

When the first member of the couple dies, $7000 would be paid out and Cigna says the premiums halve. The second $7000 would be paid out when the second partner died.

Like any insurance policy the chances are that you'll pay more than your beneficiaries receive. If you are that 58-year-old woman and you live to 88 you will have paid $11,059 in premiums and get $7000 back. If, however, you have an accident and die within a week the bet would have paid off (albeit rather unfortunately).

Although I've singled Cigna out, it isn't the only provider of funeral plan insurance. In Consumer's comparison for $10,000 cover for a man aged 64, Dorchester Life had the cheapest monthly premium. Other providers were Fidelity Life, AA Life and Pinnacle Life.

One thing worth noting is that AA Life and Fidelity Life cover from age 16 and 17 respectively, whereas the others start at a later stage of life. Another useful point to note is that AA Life's premiums are only payable up to 90 years of age with cover continuing free of charge after then. There are some policies that expire at age 100. These details need to be considered.

It's worth knowing what you are covered for before you buy. The policies usually pay out the day you take it out if you die of accidental causes. There is often a 24-month stand-down, however, for death as a result of any other cause such as illness, or heart attack. Premiums are refunded if this happens.

It's common with these policies to have a stand-down for suicide. It's 13 months at Cigna. This makes sense. It means people can't take out a policy on hearing they have a terminal illness.

The fine print of these policies is always interesting. It's worth checking when taking out this type of insurance that the sum insured doesn't automatically increase each year with a commensurate premium increase. A Cigna customer service representative assured me over the phone this week that premiums don't increase.

The fine print, however, allows the company to increase premiums if "its Funeral Plan portfolio suffers significant adverse claims experience". So never say never when it comes to premium increases.

The Insurance & Savings Ombudsman has concerns about funeral insurance. One is that if the person can no longer afford to pay the premiums they lose the benefit. It's not like they're paying into a savings account. In one case heard by the ombudsman an elderly woman was paying $64 a month, which she couldn't afford.

Just because funeral insurance exists doesn't mean you need to buy it. Anyone who has life insurance, for example, should be covered. If the policy has a funeral benefit, the money will be paid out immediately on death without going through a long claims process. AIA, for example, pays $12,500 immediately after the policy holder's death.

The difficulty with this option is that many people drop their life insurance once the house has been paid off and the kids have flown the nest. Standard life insurance also becomes almost exponentially more expensive as you get older, says Conor Sligo of LifeDirect.

Funeral directors offer pre-paid funerals. It's best to choose one that is a member of the Funeral Directors Association of New Zealand because they must pay the money into a trust fund, giving you some protection against business failure.

Some of these funeral director plans are fixed price - especially for cremations. You choose the funeral when you join and no matter how long it is until you die you will get that exact funeral.

Others are a fixed sum and when you die the money is used to buy a funeral at the current price. If you move the plan can be transferred to another funeral director in your new location - providing it is in New Zealand.

The likes of Public Trust and Trustees Executors offer prepaid funeral trusts. It costs between $150 and $210 to set the trust up and there may be an annual charge and/or closure fees. On the other hand these are managed funds and as a result should, markets willing, grow over time.

Some people come up with their own funeral plans. A reader wrote to Mary Holm recently and said he was considering drawing $6000 on an existing mortgage and depositing it in a bank account.

I asked Kiwibank this week how much this would cost at current mortgage interest and savings interest rates. The answer was approximately $15 a month. Interest rates could rise. But I doubt they'd ever double, so this option is cheaper than a funeral plan.

It's important to ensure before doing this that the money is deposited in a savings account that won't be frozen until after probate.

Kiwibank spokesperson Bruce Thompson suggested another option. Instead of discharging your mortgage when it gets down to nil, keep a revolving credit facility available for, say, $10,000. You don't pay interest on it unless you need to dip into it. That way it's there for funeral or other unexpected costs. Do ask if there are annual or other fees for such a facility.

"It does take discipline not to use the available funds simply because they are there and using the maxim of saving to buy rather than borrowing to buy for normal expenditure and purchases," says Thompson.

If you're genuinely poor Work and Income can provide a grant of up to $1971.37 for costs directly associated with funerals. Excluded are costs for flowers, donations to clergy or musician, koha, chapel fees, car hire and death certificates.

Or if you have an accident ACC may pay for the funeral (or memorial where a body can't be recovered). The ACC grant can be topped up to as much as $10,000 if the deceased was a victim of serious crime such as murder or manslaughter.

Military personnel, veterans and their partners may be eligible for War Funeral Grants from the Veterans' Affairs department. People who qualify are entitled to a lump sum payment on the death of the veteran and a lesser amount on the death of the partner.

I love AMP's advertisement in which children are given the choice of eating one chocolate fish in front of them or being given a second one if they're willing to wait. It was fascinating how some children resisted the temptation knowing it would pay off more in the future.

I'm interested in child super savers. If you know one, please email me through this website.

- NZ Herald

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Your Money and careers writer for the NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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