Financial advisers and pre-paid funeral planning

16 August 2019

Unlike the general insurance market where consumers recognize their need for home insurance, travel insurance and car insurance and buy of their own volition, suppliers of life and protection products typically have first to convince the target audience that they are financially vulnerable.

Ben Heffer, Insight Consultant (Life & Protection)

The exception perhaps is when it comes to planning for funeral expenses. Here, older people are very aware of this impending financial need and actively purchase products to help them mitigate the liability for their loved ones. This is evidenced by the strong sales of guaranteed acceptance whole of life plans – also known as over 50s plans. Paying for funerals is a major driver for taking out these plans and a significant proportion of the benefits realised each year are used to pay for funerals.

Another popular way of paying for a funeral is to buy a pre-paid plan. These are not insurance products (although some of the liabilities may be underpinned by whole of life) but rather a contractual arrangement with a provider of funeral services. People can plan and purchase the funeral they want now at today’s prices and lock in against inflation. With funeral inflation riding at circa 6% per annum and uncertainty about investment returns, this is a very attractive option compared with other forms of saving for a funeral.

According to Defaqto’s Engage database, there are 76 pre-paid funeral plan products from 18 providers including the likes of the Co-operative Societies, Dignity, Golden Charter and Golden Leaves.

Each provider offers, on average, four packaged products ranging from inexpensive direct cremation plans to more elaborate offerings with a full funeral service, limousines and a better quality coffin.

Superior plans, those that include a full funeral service with two limousines cost on average £4,000; mid-range plans, perhaps with just one limousine and a funeral that requires less travelling, cost on average £3,500. Basic plans – those that typically do not include a funeral procession and are held just at the crematorium or graveside (not at a place of worship) – cost on average £2,900.

Direct cremation plans, which are becoming increasingly popular, typically cost around £1,800. There is no funeral; the body is collected and cremated and the ashes returned to the family at a later date. In the meantime, the family can hold a wake or church service as they see fit without the deceased.

Typical specification of packaged pre-paid funeral plans. Source: Defaqto

All providers offer payment plans such that the cost can be spread over 12 or 24 months, or longer as required.

There is terrific variety in terms of what people may require when arranging their funeral and the various packages reflect what is commonly required; most providers, however, also offer a completely bespoke offering that is priced individually at the time the funeral is arranged.

Prepaid funeral plan providers are typically organisations that either own or have a close relationship with a large network of funeral director firms and will allocate the plan to a specific firm at outset. Most purchasers of these prepaid arrangements appreciate having their plans lodged with a particular funeral director whom they know and trust. Organisations that don’t have that close relationship with funeral directors, but rather seek to purchase the funeral services from a local firm at the point of claim, may have difficulties in fulfilling the precise requirements of the funeral as planned.

Prepaid plans are sold on behalf of the providers by strategic partners, by direct sales operations and by funeral director firms. The Funeral planning Authority (FPA), which oversees the sector, reports that in excess of 200,000 pre-paid funeral plans are sold each year by its members (207,700 in 2017) and less than half of that number are drawn down each year (89,800 in 2017); consequently, there is an increasing portfolio of undrawn plans – currently in excess of 1.25m.

Additionally some plans are sold by financial advisers. However, in independent research by Defaqto in 2018, only nine percent of financial advisers said they had sold a prepaid funeral plan in the previous twelve months and these had not sold more than one or two a month.

Reasons why advisers don’t recommend pre-paid funeral plans. Source: Defaqto

Of those who don’t currently sell prepaid funeral plans, almost half suggested that the product is not relevant to them: 14% simply said the product is not part of their firm’s portfolio; 18% said there is no demand for it from their clients; and more specifically, 17% said there is no demand for the product because they are dealing with high net-worth clients, who have no such need.

Among other specific reasons given were that the plans are poor value for money (11%) and the lack of knowledge of the product (9%), with a small percentage of advisers citing bad reputation and concerns about the security of the funds as reasons for steering clear.

5% of advisers indicated that they recommend more suitable products for funeral planning. One assumes that, for people with insufficient free assets to meet funeral costs, this means whole of life assurance. It is possible to set up a whole of life plan to meet projected funeral expenses, but the advantage of the pre-paid option over insurance is that it is specifically designed to deliver a funeral to the client’s specification, whereas a whole of life plan simply produces a lump sum on death. Additionally, clients with health problems or of advancing years may not be able to afford or even secure at all sufficient cover particularly given the high rate of funeral expenses inflation.  

Interestingly, of the advisers who don’t currently sell pre-paid funeral plans, 44% indicated that they would consider recommending them in future.

This is interesting because the prepaid funeral plan market is currently the subject of an HMT consultation looking into how it is regulated. There is concern that the current self-regulatory framework overseen by the Funeral Planning Authority (FPA) is not sufficient to ensure the fair treatment of consumers. The consultation will help the government design a new framework.

Eliminating organisations from the sector that engage in sharp sales practice will be welcomed by the majority of quality providers, but there may be unintended consequences that challenge the sector in future. The proposal is that this market should come under the oversight of the Financial Conduct Authority (FCA). In this case, those selling prepaid funeral plans may have to become FCA registered. This is bad news for funeral directors who may be disinclined to take qualifications, but a potential opportunity for already-qualified financial advisers looking to expand their portfolio and serve their clients better.

You can learn more about Engage Core, our end-to-end financial planning tool, and request a demonstration, here.

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