It is important to find a balance between insuring for the unexpected and paying off your debts. Make sure you are not overinsured at the expense of your savings
The average government employee spends around eight percent of their salary on funeral, life and savings policies says Clark Gardner of Summit, a Financial Wellbeing company.
Gardner, whose company provides financial solutions and financial literacy workshops, says public servants in particular spend far too much on funeral and life policies and have on average seven different policies providing death benefits. Even more concerning is that two-thirds of these policyholders could not detail the benefits nor understood the conditions of their policies.
“Taking into account the over indebted state of public servants who it is estimated to own 50% of personal loans in the country, we believe that these consumers should be settling debts which attract an average cost of 35% per annum rather than duplicating beneficiary funeral cover. The financial brokers should be held accountable to this inappropriate advice in selling policy’s which duplicate beneficiaries whilst consumers are over indebted,” says Gardner.
Gardner uses the example of Michael (name changed), a government employee who was spending around R2 000 of his R24 000 a month salary on funeral and life cover. “He was not aware of the exact beneficiaries of each policy and took the policies as a result of fear and that it ‘seemed like the right thing to do’,” says Gardner.
Gardner says the over lapping of beneficiaries and cost of these policy’s meant the client was over paying by 60% – that is around R1200 a month he could be saving. Through its online advisory service www.6cents.co.za, Summit recommended that Michael review and reduce his polices to cover beneficiaries he felt were necessary and use the savings to pay off his expensive debt quicker.
“We believe that generally funeral cover is oversold and our opinion is that such funds first need to go towards eliminating expensive unsecured debts and perhaps direct family life risks such as medical insurance and disability,” says Gardner.
A decision to take out funeral cover or life cover should form part of a proper financial plan rather than simply buying policies every time a broker knocks on your door. If your commitments to your funeral policies result in being unable to meet your debt obligations you urgently need to review your cover. Remember that taking out more policies than you can afford will also result in defaults and your policy will be cancelled with no refunds – so it is just a waste of money.
According to Liezel Gordon, Marketing Manager at Metropolitan Life, on average a funeral can cost up to R50 000. It is more cost effective to have one policy that covers the full amount than several different policies as it increases the administration costs.
When analysing your funeral benefits find out if your employer offers funeral cover. Some companies include funeral cover as part of their employee benefits although this cover is usually only for direct family such as you, your spouse and children. Many bank accounts include free funeral cover as part of their value-add benefits so find out how much cover you have through your bank.
Also be aware of the role of different types of cover. Funeral cover is used to cover the very immediate need for cash to cover funeral costs and it pays out immediately. Other types risk cover such as life cover is usually taken out to cover future expenses such as children’s education or to settle outstanding debts such as your house or car finance.
WHAT YOU NEED TO KNOW WHEN TAKING OUT FUNERAL COVER
Know what you are buying
Make sure you have cover through a reputable company that you know will pay out when you need it.
Make sure that you understand the content on your policy document; the terms and conditions, exclusions and waiting periods before you sign it. Most funeral covers do not require a policy holder to undergo any medical checks but there are waiting periods for certain illnesses, so if you or another family member die from an illness within a short period of time the policy may not pay out. “Some policies do not have any waiting periods, while others may have waiting periods of up to 12 months,” says Gordon.
Make sure your policy document has a policy number and a Membership Certificate, you must insist on this as it validates your policy. These will determine whether or not your policy pays out when you claim. If some or all of these terms and conditions are not met, that could result in the claim not being paid out. There are many scams where people buy funeral cover only to discover the documentation is fake.
Are your children covered?
Gordon says children are covered under immediate family until the age of 21 or until the age of 26 if they are still a full-time student. When the child reaches the age of 21 and they are not a full-time student, you can cover them under an extended family policy. “This is simply alteration to your existing policy and you will not need to take out a separate policy for this”, says Gordon.
Cover for your extended family
You can take out cover for your parents and siblings through an extended family policy. The only rule is that they must be younger than 85 years old when you add them to your policy or change their cover level.
Jennifer Preiss, deputy for the Long-Term Insurance Ombudsman says most policies provide cover for life; however there are a small percentage of insurers where the cover stops at the age of 65. These policies tend to be cheaper, so if you are comparing costs make sure you read the terms and conditions carefully, there is no point taking out over for your parents only to discover that the cover has expired due to their age.
Taking insurance on insurance
Although your funeral policy will normally be cancelled if you skip a premium, some insurers have a premium skip rule in place that allows you to skip one premium without affecting your cover. Some funeral policies have a premium waiver or paid benefits for permanent and total disability and or retrenchment. In the case of a ‘paid up’ benefit, the insurance company does not require any funeral premiums to be paid and the policy continues to cover all insured lives. Metropolitan’s FutureBilder Funeral Family Cover have the option of paid up benefits on death of the policy owner, in other words the cover remains in place for the rest of the family without further premiums.
Gordon says one can also choose a ‘paid up’ benefit on the cover which means when they reach retirement age (65) the cover will reach maturity and the policy will be ‘paid up”. The policy holder will not pay premiums anymore, but the cover will continue. This benefit comes at a higher premium but may be a good option if you can afford it. If you did not choose a ‘paid up’ benefit, you will have to continue paying the premiums beyond age 65.
MAKE SURE YOU KEEP YOUR POLICY DETAILS UP TO DATE
A case was recently put before the Long-Term Insurance Ombudsman which raises the importance of understanding your policy and ensuring you have selected beneficiaries on your policy.
In this case the policy owner died and did not nominate a beneficiary. As a result his ex-wife claimed the benefit and produced the divorce order with the claim document and the insurer paid the money into her. The deceased’s mother lodged a complaint as she believed that she was due the money and not her son’s the ex-wife especially as the mother had borne the cost of the funeral.
The Ombudsman’s office investigated the case and ruled in favour of the mother as the policy document of the funeral cover stated that “If the Principal Member dies and no beneficiary has been nominated or can be found, and no clear proof of marriage can be provided by the Spouse, Safrican (the insurer) shall pay the benefits to his or her relative, subject to same providing clear proof of relationship”.
In this example the insurer paid the benefit to the ex-spouse with no proof of incurring funeral expenses and the deceased’s mother was responsible for the funeral costs. The Ombudsman gave a final determination that the insurer was to pay the deceased’s mother. Safrican complied immediately and R26 000 was paid to the deceased’s mother which was the same amount that was paid to the ex-wife.
Gordon says in most cases if no beneficiaries were nominated or they pass away before the policy owner, the amount of cover on the policy will be paid to the policy owner’s current life partner. If there is no current life partner, the cover amount can be paid to the person incurring the cost of the funeral but an invoice will be required and insurer will decide who to pay.
“If any part of the benefit remains unpaid, it will be paid to the estate”, advises Gordon who adds that with formal funeral policies, the policy will always pay out the money and the money can be used to pay for funeral costs. Only when the beneficiary or life partner is no longer alive Metropolitan may pay for the funeral costs. “The policy will pay out money that can be used to cover funeral costs. Depending on the cost of the funeral and the cover taken, the policy can pay for all the funeral related costs”, says Gordon. Metropolitan’s FutureBuilder Family Cover includes a benefit that assists with transportation of the deceased’s body to a funeral home closest to their normal home. The deceased must have been a South African resident. The service can, however, also be used if they died in any SADC region countries.