The funeral savings plots
The funerals industry is keen to promote pre-planning and pre-paying as demand for lower-cost services rises. Rob Stock reports.
The nation’s ageing population means death is in the ascendancy, and it’s making the shareholders of the largest funeral business in Australasia very happy.
Invocare, which is listed on the Australian sharemarket and has a 30 per cent market share in this country, told shareholders at its November conference that death has been rising at an average of 1.6 per cent in New Zealand for the past five years.
The ‘‘growth’’ in death is not expected to peak in Australasia until 2034, chief executive Martin Earp said.
An investor who reinvested their Invocare dividends would have had a compounded return of over 20 per cent per annum since 2010.
On the other end of those statistics are New Zealand households, who all have to deal with the costly business of deaths in the family.
And, faced with cost crunches in many aspects of their lives, they have been trying to economise on their final send-offs.
In its half-year results, released in August, Invocare noted an ‘‘increasing customer demand for lower-cost offerings’’, though funeral directors grumble it’s a case of wanting more for less, as funerals have become longer, more involved affairs.
Among Invocare’s ‘‘pillars of growth’’ is increasing the number of people who pre-plan and pre-pay for their funerals.
Katrina Shanks from the Funeral Directors’ Association says people plan and save for other big life events like the birth of a child, or retirement.
‘‘We need to extend that one step further to plan for your funeral as well,’’ she says.
Many seem to agree. About 170,000 people have funeral insurance.
Others salt money away in funeral trusts, which release the money to the funeral director of their choice when they die.
Both funeral pre-funding strategies are costly compared to the way the wealthy do it.
How the rich pay
Wealthy folk don’t have to borrow for their funerals, pay expensive funeral insurance premiums, or set aside money in a not-for-profit low-interest funeral trust.
Instead, money for funerals is released by the trustees of their family trusts, so the money gets to stay invested up until the day it is needed.
That’s a distinct advantage over funeral trusts, which charge a oneoff administration fee, usually about $150, and invest mainly in low-interest cash deposits, which may not even keep pace with funeral inflation.
The other disadvantage of a funeral trust is that the money is locked away, except in cases of financial hardship.
The average age at which people put money into the Funeral Directors’ Association trust is 81.
The most common sum invested is $10,000, though burials, favoured by about 20 per cent of families, can cost far more.
Any funeral trust money not spent on a funeral goes back to the deceased’s estate.
Insuring for interment
Funeral insurance, which is sold to people as young as 30, introduces a new set of middleman looking to make a profit – the insurance company and its shareholders.
The taxman gets a bigger clip of the ticket too, getting to charge GST not only on the fees paid eventually to the funeral director, but also on the premiums paid to the insurer.
Consumer NZ has warned that people can end up paying a lot more than the cost of their funeral.
For example, a non-smoking 50-year-old man who took out funeral cover from AA Insurance and lived to 70 would end up paying just under $15,200 in premiums.
Funeral insurance is not a savings plan, which would be much better value, though savers run the risk of not having saved enough to cover their funeral, if they die young.
By contrast, funeral insurance gets the buyer immediate cover for accidental loss of life, though often not for a ‘‘natural’’ death for the first two years. However, ACC pays up to $6021.11 for the funeral of someone who dies in an accident.
Funeral cover is often sold to poorer people who want to spare their loved ones the cost of their funeral. But someone taking out funeral cover could actually be saving Work and Income money.
Work and Income New Zealand pays funeral grants of up to $2008.76 to people with little in the way of assets, excluding cars, chattels and the family home. But its asset test takes into account funeral insurance.
Cigna New Zealand’s chief executive, Lance Walker, says: ‘‘The level taken also varies widely with the average cover applied for sitting at just under $11,000. Over the last five years we have seen the initial cover purchased increase by about 6.5 per cent.’’
Borrowing to bury
There’s one final way of financing funerals that can prove costly – borrowing, though it is the deceased person’s survivors who have to take out the loan.
Fresh Funerals has Harmoney as its chosen finance provider.
A $10,000 loan at an interest rate of 18 per cent repaid over three years would cost more than $3000 in interest. There’s also a one-off $500 ‘‘platform’’ fee to pay.