You don’t really need extra funeral cover
Experts say life cover is a better option
Capitec has just launched a funeral policy that enables you to cover up to 21 dependants, and OUTsurance has announced that its new funeral policy will have a “pause and play” feature, which will give policyholders a grace period where they do not have to pay premiums for up to three months if they find themselves in financial trouble.
Frank Magwegwe, the founder of financial education company Thrive Financial Wellness, says that while it’s good to see innovation in the design of funeral products, it’s sad that the market is so over-saturated with funeral policies and that there is no innovation in the design of savings products.
Gerald Mwandiambira, a financial planner who has Certified Financial Planner (CFP) accreditation, echoes this sentiment.
“Do we need more products? No. We need more education,” he says.
Consumers need a better understanding of the difference between funeral cover and life cover, how these products work and the benefits of cover that is underwritten, Mwandiambira says.
When a policyholder is “underwritten”, it means that you subject yourself to having blood tests and answering a medical questionnaire so that your premium can be based on the risk that you pose to the insurer.
As consumers we usually prefer non-underwritten policies, because we don’t want to be subjected to the hassle of blood tests and questionnaires. But you may not realise that underwritten cover is generally much cheaper than cover that is not underwritten, especially for people who are healthy.
The average South African takes out between three and four funeral policies in their lifetime, according to research by OUTsurance. Danie Matthee, the CEO of OUTsurance, says this is not ideal and that there is a high rate of cancellations of funeral policies.
On the other hand, there is also a ten--
dency among consumers to hold numerous funeral insurance products, according to industry insiders.
Magwegwe, who is a former senior executive at Momentum and at Metropolitan, says this is because funeral insurance products are aggressively sold by the financial services industry and consumers don’t understand how they work, so they are often reluctant to cancel policies when better products come on to the market.
“It’s not like consumers love these products. Consumers are being bombarded. The products are sold by salespeople who are highly incentivised – they are paid more for selling funeral policies than for any other product. And because the products are not underwritten, they are fairly easy to sell. There’s no inconvenience for you, the consumer.”
The other driver of sales is the ‘cashback’ component, usually 20% of premiums if you don’t claim in the first five years. This is a feature of many new funeral products. Consumers misunderstand this feature and start to think of the policy as a savings product.
“When a new product comes on to the market, the consumer doesn’t want to cancel the existing policy for fear of ‘losing out’ on the cash back. What they don’t realise is that they usually pay for that cash-back benefit, by paying an inflated premium in the first place.”
Mwandiambira says consumers don’t have sufficient understanding of how funeral insurance works. “It doesn’t help that industry players aren’t fixing this. The product is the biggest contributor to the profits of the companies selling them,” he says.
Magwegwe says that if you insured your car with Insurer A and a better product was launched by Insurer B, you wouldn’t dream of insuring your car with two insurers, yet when it comes to funeral cover, that’s what consumers do. Consumers do this because there is no limit to the number of funeral policies that a person can have.
However, if you are over-insured, you could be wasting your money.
Mwandiambira and Magwegwe stress that it is much cheaper to buy life cover than to try to use funeral cover as a substitute for life cover.