Funeral insurance: how it works, and when it does not

Funeral insurance is life insurance with a small sum insured and light underwriting. It pays a lump sum on death, usually paid quickly, and the money is not restricted to funeral costs despite the name — it goes to your estate or nominated beneficiary like any other life policy.

The product exists because of a real problem. When someone dies, money is needed within days: the funeral director’s account, a burial plot or cremation fee, a death notice, catering, and travel for family. Bank accounts in the deceased’s sole name are frozen, and probate takes weeks or months. Somebody has to fund that gap, usually on a credit card.

Why it is sold the way it is

• Limited health questions, which appeals to people who expect to be declined for full cover.
• Small sums insured, so the monthly premium looks manageable in isolation.
• Marketed heavily to people over 50, often through television and direct mail.
• Marketed as guaranteed acceptance within an age band, in exchange for an initial period covering accidental death only.

The uncomfortable arithmetic of funeral insurance is that premiums do not stop. On a stepped policy bought at 55 and held to 90, total premiums paid can exceed the sum insured — you would have been better off putting the same money in a term deposit.

Insurers deal with this in different ways, and the differences are the most important thing to check. Some policies cap total premiums at the sum insured. Some stop premiums at a stated age, often 85 or 90, while keeping the cover in force. Some increase the sum insured over time. And some do none of those things.

1. 1Ask whether premiums stop at any age, and if so, which.
2. 2Ask whether total premiums are capped at the sum insured.
3. 3Ask whether the sum insured increases over time, and whether the premium increases with it.
4. 4Ask what the premium will be at 75 and at 85, not just today.
5. 5Compare all of that against a small level term life policy, if you can be underwritten for one.

For anyone in reasonable health, a small level premium term life policy usually buys several times the sum insured for the same money. The trade is that it requires underwriting and it may expire at a stated age. Both are worth checking before defaulting to funeral cover.

There is a real case for it, and it is narrower than the advertising.

• People who have been declined for fully underwritten life cover and want something in place.
• Older applicants for whom underwritten cover is unavailable or prohibitively expensive.
• People who want a small, ring-fenced amount that does not get tangled in an estate.
• Anyone who knows they will not maintain a savings account for this purpose.

Against that, consider the alternatives honestly. A dedicated savings account earns interest and is yours if you never need it. A small term life policy costs less per dollar of cover for anyone who can be underwritten. A prepaid funeral plan arranged directly with a funeral director fixes the cost of the service itself, though the money is committed to that provider. Each of those beats funeral insurance for some people.

Every New Zealand insurer writes funeral cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• Initial exclusion periods, during which only accidental death is covered, differ in length between insurers.
• Some policies cap total premiums or stop them at a stated age; others do not, and the difference compounds over decades.
• Sum insured maximums vary, and so does whether the cover increases over time.
• For applicants in reasonable health, an adviser can test whether underwritten term life cover is available at a better price per dollar.
• Where existing life cover already includes a funeral advance, an adviser can tell you whether a separate policy adds anything.
• Being declined by one insurer does not mean being declined by all — appetite for the same history varies.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.