An expense you could avoid

By THIS IS MONEY
Updated:

 

MANY elderly people are throwing away money by paying into poor value pre-paid funeral plans they do not need. These plans exploit people's natural concern not to burden their families with extra expenses after they have died.

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Their brochures use alarmist figures about the rising costs of funerals. They then promise that in return for a lump sum or regular payments, the plans will cover the costs involved.

Richard Bark-Jones, a partner at solicitors Moorecroft Urquhart, says that funerals are often paid for out of the deceased's estate. With the costs of a funeral usually less than £2,000, he says it is rare for there not to be enough money to cover them.

'There is no purpose in having one of these pre-paid funeral plans unless there will be a deficiency in the estate and someone may need to put their hand in their pocket,' he says.

The Department of Social Security pays out up to £600 towards funeral expenses on top of standard fees for burials or cremations for people receiving a range of benefits or credits, such as Working Families' Tax Credit.

The payment is not taxable and is non-contributory. Savings are taken into account. If someone dies and has no family, then the local authority will arrange and pay for the funeral if there is no other money available.

Frank Pearson, 76, from Dalton-in-Furness, Cumbria, is shocked at the poor value of the £9.95 a month pre-paid funeral plan he took out with GA Life - now part of Norwich Union - in 1993. The plan will pay out £1,154 when he dies.

Retired steelworker Mr Pearson thought he would be saving his loved ones extra work after he passes on. But he recently found out that despite having paid in £860, the cash-in value of the plan is a mere £120.

In order for the plan to pay out, he will have to keep on paying into it until he dies. Mr Pearson accepts that the policy would have paid out in full if he had died soon after taking out the plan despite having paid in very little, but he says it is a lousy deal.

'If I live to my parents' ages of 85, then I will have paid in more than £2,000 and that's not counting the interest that I could have earned in a savings account,' he says.

Often, pre-paid funeral plans are backed by whole- of-life insurance plans that can prove to be particularly poor value for older people. This is a real problem given that these plans are usually aimed at the over-50s.

Whole-of-life plans use some of the money paid in to provide life cover and the rest is invested. But the older you are, the higher the percentage of the money which is used to buy life insurance, so cash-in values are very poor. The Co-op's whole-of-life based FuneralCare plan has no cash-in value, while its investment-backed Funeral Bond simply returns the money invested with no interest and minus a £50 fee if it is cashed in.

Someone paying £15 a month into the National Deposit Friendly Society funeral plan will have paid £1,800 after ten years. But the cash-in value after ten years is just £1,150 - which is £650 less than has been invested.

Petronella West, an independent financial adviser at Investment Quorum, says that this is poor value compared with other whole-of-life plans. 'There are better priced products elsewhere, but even they aren't particularly good value for people of this age. You would be better off saving the money instead,' she says.

Help the Aged's funeral bond returns the original money paid in, but with no interest. There is no cancellation penalty.

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