Pre-paid funeral plans

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Pre-paid funeral plans

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Even the simplest funeral is not cheap, and the idea of paying for your own
funeral in advance is catching on in the UK. The advantages of a pre-paid funeral are that you can choose the type of funeral you want and you don't have to feel a burden to relatives by leaving them to pick up the tab. Also it's easier to shop around for the best deal when you are planning ahead. Very few people feel inclined to shop around different funeral directors immediately following a death in the family.

Typically, a pre-paid plan works like this. You choose a funeral and pay for it at today's prices - either by handing over a lump sum or by making instalments spread over, say, five years. The idea is that the plan will pay for your funeral whatever the increase in funeral costs between now and then.

In practice, you can't always rely on all the funeral costs being met. You can divide the cost into two parts:

• the funeral director's fees and expenses which the plan normally guarantees to pay; and
• disbursements' - things like doctor's fees, church fees, the cost of a minister, cremation fees, the burial fee, the grave digging fee and the cost of a burial plot.

Often a plan will guarantee to pay only the current cost of these plus any increase in line with general price inflation. However, in recent years, these costs have tended to increase much faster than inflation. If this continues to be the case, your estate or relatives could face a bill for, say, £200 or £300, despite your having a pre-paid funeral plan. You need to check the small print carefully to see just which costs are guaranteed and which are not.

Many different surveys conducted found that although the literature usually made this clear, funeral directors and middlemen selling the plans often gave confusing and even misleading verbal guidance on this point. You should also check what is included as part of the funeral. For example, a simple funeral might not include a church service -your estate or relatives would have to pay extra if this was to be part of your funeral. The money you pay for the plan is invested. It builds up a fund that the funeral director uses eventually to finance your funeral.

However, pre-paid funeral plans are not technically investments - you are simply deemed to be paying in advance for a service. As such, pre-paid funeral plans do not come within the system of regulation. In fact, there are no laws or regulations governing these plans, so you need to take care when choosing them. The main concern is what happens to the money you pay. For example, in 1993, £35,000 disappeared from a pre-paid scheme in Huddersfield and 30 elderly people's funeral arrangements were jeopardised. Fortunately, another company stepped in to help. Larger providers nearly always pay your money into a trust fund. This is an important feature. In a trust fund, the money is safe from misuse by the funeral director and safe from the director's creditors if the firm goes bust. This means you can be reasonably certain that the money needed to provide your funeral is secure and will be available when needed. Some smaller providers simply pay the money into a client account.

You need to check what safeguards there are to protect the money from misuse or seizure by creditors. If there are no safeguards or the position is unclear, avoid the plan. The funeral industry has responded to concerns by setting up its own codes of practice to regulate the sale and management of prepaid plans. Two rival trade bodies operate these codes: the Funeral Planning Council (FPC) and the National Association of Pre-Paid Funeral Plans (NAPFP). The codes include requirements for customers' pre-payments to be held in a trust fund that is independently administered, e.g., by a bank - and for a formal complaints- handling system. The Funeral Ombudsman Scheme can consider disputes that a member firm has failed to settle.

However, codes of practice are only as good as the monitoring and enforcement systems, and membership of the trade bodies and ombudsman scheme is voluntary. So be wary if you are attracted to a pre-paid funeral plan. If a plan does not guarantee to cover all the costs, it might be better to earmark some of your savings or investments to cover eventual funeral expenses. Although pre- paid funeral plans are not investments as such, they are clearly very similar.

The Financial Services and Markets Act (expected to become law in 2001)
contains measures allowing the plans to be brought within the scope of the
Financial Services Authority if voluntary regulation is deemed not to be working adequately. Do not confuse pre-paid plans with funeral expenses insurance. The latter is life insurance that on death pays out an amount, which is intended to be enough to cover your funeral costs. However, the insurance is not linked to any particular funeral and there is no guarantee that it will be enough to cover the costs.

Funeral expenses insurance is often poor value - because you are usually elderly when you start the plan, the premiums are high and if you live a long time, you can end up paying more for the plan than it will pay out. Prepaid funeral plans are sold through funeral directors and often advertised in magazines aimed at older people. If you do take out a pre-paid funeral plan, don't forget to let your relatives know about it - otherwise they may arrange and pay for a funeral elsewhere, in which case your plan will be wasted. When choosing a pre-paid funeral plan, be sure to ask: whether the proceeds are paid into a trust fund and who administers it; whether all disbursements are covered, regardless of inflation (and if this applies equally to burial and cremation); whether all incidental expenses are covered; what happens if you choose to pay by instalments and die before completion; and whether you can choose your funeral director without restriction.