Are you the type of person who likes to prepare for the unexpected in life? Would you have peace of mind knowing that your loved ones would be taken care of financially, if the worst were to happen to you? If so, then you may be considering a funeral plan or life insurance policy to help cover your funeral costs when that time comes. No one likes to think about death, but with the cost of dying now reaching more than £9,000 in the UK, it’s certainly worth thinking about putting financial provisions in place for this inevitability.
When looking at both life insurance and funeral plans, there’s a lot to consider before taking the plunge and opting for one or the other. It’s a substantial investment that needs careful thought. To help you along this journey of future financial planning, Reassured, a UK-based life insurance and funeral plan broker, has put together this simple guide. We compare the cost and features of both forms of cover, as well as outline their advantages and disadvantages.
What is life insurance?
Life insurance is a type of policy that pays out a cash lump sum if you passed away during the term of the policy. The pay out amount is set to cover certain financial obligations in your life, as well as additional costs that may incur as a result of your passing, including funeral costs.
There are different policy types to suit different needs. You can get term-based cover which expires after a certain length of time or you can get whole of life cover or over 50s life cover which both guarantee a pay-out when you pass away.
You’d pay a monthly premium to keep the cover in place, which can cost from as little as a few pounds a month.
What is a funeral plan?
A funeral plan allows you to pay a fixed sum in advance to cover your key funeral costs. It also allows you to plan your own send-off ahead of time, with support from a professional. You can choose from a range of plans available on the market, based on your requirements and budget.
A funeral plan has no cash value when the time comes for your funeral, but it does guarantee to cover your key funeral services at the same rate as when you bought the plan. This means even if prices have risen in the future, your loved ones won’t be expected to pay the difference.
Plans usually cost from around £3,000 for a traditional funeral but you could spread the cost out in monthly payments so that it’s affordable.
Advantages of life insurance
- Life insurance provides a cash pay out
A cash lump sum pay out can be spent however your family wish, whether that be for your funeral or for other expenses.
- Life insurance provides all-round financial protection
Life insurance is designed to protect your loved ones from financial hardship if you were no longer around to support them. Depending on your individual circumstances and the type of financial responsibilities you have in life, then the level of cover you can secure will probably be more than just what’s needed for your funeral.
- Life insurance can be written in trust (minimise inheritance tax)
Having your life insurance policy written in trust means your loved ones would receive a pay out much quicker. It also ensures that your life insurance policy is exempt from inheritance tax as it would not be considered as part of your estate.
Advantages of funeral plans
- A funeral plan guarantees your key funeral costs (at today’s rate)
Funeral costs are rising faster than inflation year on year. However, a funeral plan can lock-in today’s rate for a funeral so that your loved ones are protected from higher funeral prices in the future.
With some life insurance policies, especially over 50s life insurance, the level of cover may not be enough to cover all your key funeral costs.
- There are no medical questions
Unlike some forms of life insurance, a funeral plan guarantees acceptance. This means if you have any health concerns or a poor medical history, this has no effect on your ability to get a plan.
- A funeral plan can be cancelled (and money refunded)
If your circumstances change at any point, then a funeral plan can be cancelled and the money refunded (less, perhaps, a cancellation fee). Whereas, if you cancel a life insurance policy your cover would come to an end and your investment would be lost.
- A funeral plan ensures your final wishes will be fulfilled and that your loved ones won’t have to arrange the whole funeral
You can decide what type of funeral you want to have and record your final wishes. This also gives some relief to your family who may find it hard planning the whole funeral when the time comes.
Disadvantages of life insurance
- Life insurance expires (unless you get a guaranteed pay out)
Term-based life insurance expires after a certain period, and of course, you may not pass away during this time. Once a policy has come to an end you would need to find new funeral cover. Unless you opt for life assurance, such as whole of life or over 50s life cover, which guarantees a pay out when you pass away (but premiums tend to be a little higher).
- You could pay more into a life insurance policy than what’s paid out
Policies that provide a guaranteed pay out, such as whole of life, require premium payments up until you pass away. This means, depending on how long you live, you could end up paying more into the policy than what’s paid out.
Disadvantages of funeral plans
- A funeral plan could cost more (especially in the short term)
The longer you live, the more you end up paying into a life insurance policy. However, a funeral plan could still work out more expensive.
- A funeral plan forces you to think about death
Planning your own send-off may seem like a strange concept, especially if you’re still fairly young and healthy.
Best of both worlds?
People over 50 have the alternative option of over 50s life insurance. Over 50s is a slightly different type of policy that provides a smaller cash pay-out (usually up to £25,000) which is guaranteed when you pass away and can be used towards funeral expenses. The amount of cover you can get is based on your age, rather than any health factors. An over 50s life insurance policy could also help to cover additional death related expenses, that are included in the total cost of dying which is currently £9,263 in the UK.
So, what’s it to be, life insurance or funeral plan?
Life insurance is certainly a good option for those who are still fairly young and have good health, as they can get the best rates. However, as a young person you’re more likely to opt for a term-based policy rather than whole of life, and this means your funeral costs may still be a matter of concern later in life. If you’re older, perhaps in your 50s or 60s, without any health issues then you could probably secure a good rate for whole of life insurance and get a much larger pay-out (if required). However, if you’re older and have a serious health condition, then life insurance may be too expensive, or you may be declined cover. In this case, a funeral plan could be the ideal solution. Also, some people like to have the peace of mind that their money will pay for their funeral and that they can prevent family from overspending when the time comes. This is when a funeral plan is the better option, as a life insurance pay out can be spent however the family wish to spend it.
Need more help? Use an FCA regulated broker
The best way to find out which product is right for you is to compare prices and features for both. You can do this by using a free broker, such as Reassured. They do all the hard work for you, from finding the cheapest quotes from a range of providers, to filling in the application form. It can feel reassuring to have someone guide you through the process and answer your questions, so that you can make a fully informed decision.