Pre-paid Funerals - Frequently Asked Questions
Disclaimer. There are quite a few pre-paid funeral products available in New Zealand. The details vary from one to another so providing exact information on each one is not possible in this broad overview. Before you purchase any product we recommend you consider and examine more than one option and even obtain advice from independent advisors like lawyers or accountants. The providers of this overview cannot be held responsible for outcomes following the purchase of any pre-paid funeral product.
1. What is the difference between pre-paid and pre-arranged funerals?
A pre-arranged funeral is where funeral and service details are decided now, in discussion with a funeral director, and used at a later date.
A pre-paid funeral is a financial arrangement whereby the agreed services are paid for now and provided at a later date.
While these are two separate actions they can usefully be considered together - please refer to question 5.
2. Why do people pre-pay their funeral?
People have two major reasons for prepaying funerals.
i) Most of us plan for nearly every financial eventuality we may face throughout our lives - buying a house and car, having a family, retirement and so on. Our death is another event but one which is sad and stressful for our family to deal with. By pre-paying our funeral we can relieve our family of that particular worry.
ii) Another reason for pre-paying is if the need arises for long-term residential care in a rest home or hospital. In those circumstances a person wishing to receive Government funding (the Residential Care Subsidy) is required to have a financial means assessment. The value of any pre-paid funeral of the person, or their spouse, up to a maximum value of $10,000 is exempted from the means assessment. Please note: only the amount you have contributed up to the day you are assessed is exempt. (Contact Work and Income for more information.)
3. How do pre-paid funerals work?
Most pre-paid funerals are basically life insurance policies but with a different name. There are many providers but they work in one of two ways: some require payments each month for the duration of the policy; others are paid up within a short time of starting the policy usually about two years) by lump sum amounts. (See question 9 - "What happens to my payments".)
The cover value of the plan or policy is decided by you but typically it could range from $4000 up to $10,000. See question 5 for more information.
In the event of death the cover value of the policy (or in some instances, depending on the policy conditions, the paid up value at the time of death) is paid out towards to cost of the funeral.
4. Which type of plan is best?
The only way to ensure you get the plan that suits you best is to shop around. When you do evaluate your various choices however, make sure you understand the fine print details in the policy documents as some may have drawbacks. For instance:
- Missing payments can result in some policies being cancelled.
- Cancelled policies, for whatever reasons, can result in all payments being forfeited.*
- With some policies you can end up paying instalments which total much more than the actual cover value of the policy.
- Check that your pre-paid funeral plan is with a reputable commercial company.
- Some policies have a two year stand down period, following the start of the policy, for pre-existing medical conditions.
* Statistics show that due to unforeseen changed financial circumstances and therefore affordability, there is a 30%+ attrition rate on monthly instalment policies.
5. How do I decide the value of the pre-paid funeral plan?
This depends on what type of funeral you wish for and also where you live. For example: choosing cremation will cost less than a burial; a burial plot in some areas can cost $5000 while in other areas it can be less than $1000. These are just two of many possible variables.
To be really useful the cover value of a pre-paid funeral plan needs to be reasonably accurate. So getting an estimate makes a lot of sense which means deciding first on what you wish for your funeral.
Assembling your thoughts is made easier by talking with a funeral director. They will help you with decisions on the service, burial or cremation, the casket and catering and other cost influencing matters. They will help further by organising your ideas into a plan and supplying an estimate. Then you will know how much pre-payment to allow for rather than taking a guess.
6. What if the cost of funerals goes up before I die?
Some policies are inflation adjustable - you can arrange to increase the policy value and the instalments. Others, such as some lump sum plans, accumulate interest which contributes towards cost inflation.
If the value of the policy at time of death is less than the funeral costs then the balance is usually paid by the deceased's estate.
7. Can I pay too much?
With some policies you can end up paying instalments which total much more than the actual cover value of the policy.
Fortunately there are also plans which provide for paying surplus funds to the deceased's estate when the pre-paid value exceeds the funeral expenses.
8. What happens if I move to another centre?
Generally pre-paid policies and plans that are held with reputable and established insurance companies are payable where ever you live in New Zealand. Policy fine print will reveal this.
If you move overseas to live then your policy is unlikely to remain valid for burial outside of New Zealand. If migration is a possibility then ensure this point is checked when you evaluate various options.
9. Who looks after my payments?
What happens to your payments should be declared in the information about every policy or plan. If this isn't shown or you are not sure then it is best to consider other policy options.
Most pre-paid funeral policies are underwritten by insurance companies, and they hold the payments. While no guarantees can be given, such companies are generally reliable. In some instances pre-payments are held in trusts. For your own peace of mind seeking advice from independent advisors such as lawyers or accountants may be worthwhile.
10. Is a pre-paid policy immediately effective?
Usually policies, particularly monthly instalment policies, have a two year stand-down period for pre-existing health conditions and for suicide. Fully paid up lump sum plans are usually immediately effective.
11. Do all of my payments go towards my funeral?
As with all insurance policies commissions, management and administration costs are deducted from payments. The policy documentation should explain all deduction details. However policies can also attract income from interest which helps offset such costs. That income adds further worth particularly when the policy has accumulated a reasonable paid value, such as with lump sum payments.
For information on the FDANZ Funeral Trust (the only pre-paid funeral plan endorsed by the Funeral Directors Association of New Zealand) click on this link