Other problems with funeral assurance schemes
There are many problems with funeral assurance in addition to the three that could be grounds for class actions. Advocate Chris Shone says the problems are:
◆ No contractual provision for premium increases. Shone says that life assurance companies can increase premiums with or without notifying policyholders, while the benefit is not increased. “If your premium is going up by 15 percent a year and it’s R20 a month now, in five years it will be R40 a month, but you still only get a lousy R5 000 funeral benefit,” he says.
◆ Cover is from month to month. “This means the cover can be cancelled by the ‘insurer’ at any time, and that if the policyholder fails to make payment, cover terminates and all is lost,” he says.
◆ No paid-up values. Funeral assistance policies do not provide a surrender value, Shone says. “You stop paying, it’s over. With [some] other insurance products, you get a paid-up value or surrender value when you stop paying. A formula is applied to work out the value; you don’t lose everything. In this game, you lose it all.”
◆ No insurable interest. Insurance companies in the United States have been sued for not establishing whether, in fact, a person who takes out a policy had an insurable interest in someone else’s life, Shone says. “Here we don’t care. No one checks who has an insurable interest in whom,” he says.
◆ Double underwriting. It is common for an undertaker who has issued a funeral policy to approach two life assurers and re-insure the policy twice, Shone says.
“The policyholder doesn’t know this. When the policyholder dies, both insurers get a death certificate – and you can get around the originals, because everyone certifies everything these days. The undertaker uses one payout to do the funeral and pockets the other. It happens a lot.”
◆ Actuarially unsound premiums. Shone says it is not uncommon for a funeral scheme to consist of a bakkie, a hearse and a couple of machines. Apart from that, there are no assets and no reserves.
“In the event of a flood of claims, the business would go bust and there would be no means of recovering money for policyholders. Long-term insurers have to have reserves or re-insurers – not in this business,” he says.
◆ No “pre-paid” funeral plan. Shone says an assistance policy provides cash to meet the costs of a funeral, but it is not a prepaid funeral plan, which is the perception among many consumers in this market.
◆ Excessive commissions. Commissions in the funeral assistance business are exorbitant – they can exceed 30 percent of the premium, Shone says. Funeral assistance is the biggest sector of the insurance industry, but the commissions are not regulated.
◆ Premiums are payable for life. “Generally, this is the case, which is fundamentally flawed. With an escalating premium, you’re going to be paying, at age 99, probably R5 000 a month for your R5 000 funeral benefit. It makes no sense.”
Shone suggests that premiums be made payable for a certain term until the age of retirement, but that the benefits remain in place until death.