Can you afford to die?
A growing number of New Zealanders are daring to look death in the face and pay for their funeral in advance.
At the end of last year, there were just under 166,000 "guaranteed acceptance" life insurance policies on insurers' books, according to the Financial Services Council.
The vast majority of these are funeral policies, small life insurance policies designed to pay out within 48 hours of a claim being made so policyholders' families do not find themselves under financial pressure in the event of their death.
That's roughly one policy for every 12.5 adults over the age of 40, a big jump from the end of 2008 when there were just under 100,000 policies, one for every 19 people aged 40 or over. The starting age for many funeral policies is 50 and over.
At the end of December, annual premiums were nearly breaking through $60 million, around $360 a head for those with policies, though premiums vary by policy, insurer and the age a person takes out their cover. There's been a rise in the marketing of funeral insurance in recent years, with the likes of the AA, Cigna, and Pinnacle Life encouraging people to follow Australians and Americans into pre-planning and pre-funding their funerals.
Kiwis have typically been less likely than people in other OECD countries to pre-fund their funerals.
Former National MP Katrina Shanks from the Funeral Directors' Association (FDA) said a combination of poor financial literacy and an unwillingness to talk about death meant only around five per cent of people either had funeral insurance or set money aside to specifically pre-fund their funerals.
For many, pre-planning is important, as death can be an expensive business - especially if family or cultural tradition requires a big sendoff.
The cheapest packaged option for dealing with a person's mortal remains start at between $1500 and $2000. For example, a no-frills cremation costs $1795 with Souly Cremations, which will collect a loved one, cremate them, register the death, and return the ashes.
Whatever other ceremonies and parties the family have at that stage, is up to them, and that can be as simple as an ashes scattering on a beach or a gathering in a family home.
But if you want a burial, particularly in a city like Auckland where cemetery plot prices have risen in recent years far faster than inflation, the cost can easily get to $10,000.
And a pleasant-looking coffin can easily cost around $1000 by itself, though the cost varies hugely. Some opt to save money and build their own while yet others opt for eco caskets like those sold by Return to Sender for between $1000 and $2500. New Zealand company Final Furniture even offers a $2345 coffin you can use as a bookshelf and wine rack until it is needed for its final use.
Costs depend on whether you opt into the growth of cheaper cremations, go for a more traditional cremation package, and/or choose a full burial with a graveside send-off.
Tauranga funeral director Jones and Company says the average cost of a cremation funeral service is around $7100, compared with $8700 for a burial funeral service.
Stephen Dil, vice president of the FDA, said for those people who are means-tested on benefits, Work and Income allows $10,000 to be tucked away in a pre-paid funeral trust. That, he says, provides some indication of the rough amount many spend.
That $10,000 also corresponds to the most popular level of cover taken out by policyholders of online insurer Pinnacle Life, which aims to offer the cheapest funeral cover on the market. But it sells policies providing $25,000, and there are plenty of takers for that as well, Pinnacle Life's Ed Saul says.
Broadly speaking, people have four options when approaching planning for their own funeral.
1 DO NOTHING
Ignore it, and let your executors or survivors pay out of the money left.
But it can be difficult to get the money to pay for a funeral when it is held in estate which is one of the reasons many take out funeral policies. For those leaving only an empty bank account, Work and Income may pick up the tab to a maximum of $1971.37, just enough for a budget cremation without a service. For the family or friends involved, that grant is means-tested at a low level despite lobbying by funeral directors. Often families resort to money lenders to pay the funeral costs.
Finance Now and Speedy Loans both advertise personal loans to pay for funerals. The online calculator for Finance Now shows a $5000 loan repaid over 24 months would need repayments of $292.03 a month, indicating a borrowing rate of 35 per cent.
2 FUNERAL INSURANCE
Concern over affording the funeral bill drive many to buy insurance cover which generally pays out within 48 hours of a claim being made to whoever the policyholder nominated. People often combine funeral cover with a letter of wishes as to what they want to happen, for example, stipulating whether you want to be buried or cremated. Funeral cover is easy to buy and is largely sold on a "guaranteed acceptance" basis which means everyone can get it. Smokers pay more than non-smokers and women pay less than men. Premiums remain the same for the lifetime of the policy, though some insurers claim the right to increase them if tax laws change or they get a run of claims.
On payment of the first premium, cover for accidental death is immediately in place. However policyholders are generally not covered for death by illness for two years, a measure designed to prevent the grievously sick from "gaming" the system.
The risk with funeral cover is that policyholders are likely to effectively over-pay for their funeral. Insurers charge premiums that they believe will enable them to pay claims and still make a healthy profit. Collectively, policyholders were paid claims of $23.6m in 2013, compared to the more than $55m of premiums they paid during the year, FSC stats show.
A non-smoking, non-AA member, who takes out $10,000 cover from AA Insurance at age 50, for example, and who dies two years and a day later, will have paid $1189.92 for their cover having paid premiums of $49.58 a month, but whoever they nominate to get the payout will receive $10,000. Should that man not die until age 75, he will have paid $14,874.
Couples wanting cover can save money by taking out "joint" policies. These provide the same cover for both, and should one die, the policy continues to cover the surviving partner. This saves 20 per cent on premiums, on Pinnacle Life.
3 ORDINARY LIFE COVER
The third option people have is to buy life insurance which has a "funeral benefit" such as Sovereign's policy, which will pay out $15,000 within 48 hours just like funeral cover.
4 SAVE A LUMP SUM
The other way people routinely cover funeral costs is to save the money. The chance of needing to be buried before the age of 50 is relatively low, one of the reasons why most funeral insurers only accept policyholders above that age.
Many people may consider the chance of dying under the age of 50 is so low, they run the gauntlet of not pre-funding their funeral while saving up for it.
If death occurs through a work or road accident, ACC may make grants to their survivors.
Once the money is saved, some pre-pay for a funeral director. Often people pre-pay for funerals at trigger points in their lives such as when they move into a retirement village. Some simply hold the money in their own trust accounts. Others use the help of FDA members to deposit their lump sum with the FDA Funeral Trust.
- Sunday Star Times