Funeral insurance under fire after elderly woman pays twice the cost of farewell

An 85-year-old woman paid $18,900 for funeral insurance worth just $10,000. Photo / 123RF

People with funeral insurance are at risk of shelling out more in premiums than the cost of a funeral, a consumer watchdog warns.

Consumer NZ chief executive Jon Duffy said people taking out funeral insurance policies are leaving people out of pocket to the tune of thousands of dollars.

They could even end up paying twice as much in premiums than their policy was worth, he claimed.

Duffy said in a recent case an 85-year-old woman who paid $18,900 for funeral insurance worth just $10,000 was denied a refund of overpaid premiums by insurer Fidelity Life.

He said the woman took out funeral insurance in 2003, paying for cover for herself and her son. The policy had a value of $5000 for each life insured.

"Over 17 years, she paid almost $9000 more in premiums than the policy would ever pay out in funeral costs."

Fidelity Life declined to refund the additional premiums, stating the policy was working as "designed". The most the company would do was stop billing for further premiums and make the policy paid up.

Duffy said Fidelity Life claimed funeral insurance was a "risk-based" product and customers wouldn't get a refund if the risk didn't occur or if the amount of a claim was less than the premiums paid.

However, funeral insurance wasn't the same as other risk-based insurance, such as house or contents insurance, he said.

"Funeral insurance covers an event that's guaranteed to happen – your final send-off. Selling funeral policies that result in customers paying thousands more than the cover will ever be worth doesn't wash with us."

Duffy said funeral insurance was heavily promoted, playing on people's fears about being a financial burden on their families. However, the lifetime costs of the product were seldom disclosed.

If customers couldn't afford to keep up premiums, there was typically no refund if they cancelled. Most policies only had a short cooling-off period after purchase when the customer could cancel and get their money back.

Consumer NZ was pushing for law changes to stop companies selling funeral insurance, and other insurance products, that provided poor value for customers and contained unfair terms.

A spokesman for Fidelity Life Hamish Anderson said the funeral cover in question related to a product called Funeral Plan, a policy originally sold by Tower directly to consumers, but which was no longer on sale.

Tower's life insurance business was acquired by Fidelity Life in 2013.

Anderson contested the argument that people were overpaying saying the nature of insurance meant some policy holders might pay more than others.

"With all risk-based insurance – not just life insurance - there's no money refundable if the insured risk doesn't occur or if the policy is cancelled before the insured risk occurs or if the amount of a claim is less than the premiums paid," he said.

"For example, if you never make a claim on your car insurance, over time it's possible you could end up paying more in premiums than the amount the car's insured for. In this situation you wouldn't be eligible for a refund."

He said the purpose of risk-based insurance is to pool risk across the whole group of customers paying premiums.

With funeral plan policies, the pooling of risk enabled customers to be immediately covered for the full sum insured for accidental death and, after 12 months, any cause of death, despite the fact that only a small amount of premiums might have been paid in comparison to the sum insured.

Those customers who lived a long time would pay more premiums.

Anderson said the company had recently announced reductions in underlying insurance rates on funeral cover to make it more affordable for older customers.

"Our advice to New Zealanders with questions about any financial product, including funeral cover, is to seek independent financial advice," he said.