People often confuse these two types of risk cover or think that they serve the same purpose since both types of cover are paid out in the event of the death of the insured person. They are, however, very different products that serve different purposes and we will look at each in more detail in this article.
The purpose of funeral cover is to provide the deceased’s loved ones with a lump sum of money within a few hours of receiving the claim, to assist them with the costs relating to the burial or cremation of the deceased, including related grocery purchases, transportation of the deceased’s remains, etc. Initially, funeral cover was only used to cover these burial costs, but most insurers have in recent years been including various add-ons to these policies. Some of these add-ons include paying an income to the family members of the life-insured for up to six months, which is a big reason why people may confuse life cover with funeral policies. It is, however, important to understand that this is not standard in the policy, but only an add-on, therefore it is important that you read and understand exactly what is included in your cover when taking out a funeral policy.
A benefit of funeral cover is how quickly it can get paid out to beneficiaries. A deceased person’s bank account will be frozen as soon as they pass away until the Master of the High Court has appointed an executor to the estate, a process that can take several months. Funeral cover can provide some cash in this interim period.
Some things to be aware of regarding funeral cover, should the beneficiaries want to use it to cover expenses other than the cost of the funeral itself:
- Firstly, depending on how the product is structured, some insurers may pay the cover directly to the funeral home rather than as a lump sum to the beneficiaries.
- Secondly, be aware of having various funeral policies, hoping it can provide a big lump sum pay-out in the event of death. Remember, funeral cover is meant to cover costs relating to the funeral. Some insurers may only pay out a portion of the cover if the deceased has more than one policy, because they may regard these various policies to over-insure the event the product was designed for – the funeral costs. The concept of over insurance is based on the idea that insurance products should not be used by a policyholder to make a profit, but rather just to assist in paying the specific costs relating to the insured event.
Often employers provide some funeral cover along with other employment benefits, so before buying additional funeral cover make sure that you do not already have enough cover via your employer’s group risk product. Also take time to read and understand the policy’s conditions to make sure how the claim will be paid out and if they will consider other cover that you may have in place before paying the claim.
Life cover begins where funeral cover ends. Once the short-term obligations are paid for by the funeral cover, the lives of the deceased’s loved ones carry on and if those loved ones were financially dependent on the deceased, it will be very difficult for them to adjust back into daily life without a life policy that assists them in covering their day-to-day costs. Life cover, other than funeral cover, will aid in covering longer term financial obligations such as children’s school fees, bond repayments and debt obligations, to name a few.
There is no limit to the amount of cover that can be taken out per life insured, it rather depends on what premiums the policyholder is comfortable paying. This is usually where a financial adviser plays an important role in helping you calculate and plan how much life cover is adequate given your personal circumstances.
Life cover is usually subject to being underwritten. This may make many people avoid taking out life cover, because there is often a perception that these medical questions and tests are invasive or just simply time consuming, but if you live a healthy life and don’t have many health conditions, underwriting the policy may help bring down the premiums. This is because you would show the insurer that you are less of a risk to them than an average life-insured. Therefore, underwritten policies should be considered as having an advantage above those that do not underwrite risk, such as funeral cover, as they will usually have lower premiums given the benefits you can claim.
Funeral cover and life cover address different needs and it may or may not be necessary to have both to ensure your loved ones don’t need to suffer financial burdens during an already difficult time when a loved one passes away.