Recently on TV there was a discussion on funeral insurance. It was felt that insurance companies pressured people to purchase funeral insurance. It was estimated that if funeral insurance held for over 10 years the amount paid out on a claim was significantly less than what the insurance premiums would have cost during that time. The same point could be used for any type of insurance but this one was more easily able to be quantified in terms of cost vs benefit. So is insurance of this nature a rip off or does it provide a significant benefit?
There are 5 ways in which you can address risk:
1) Risk Transference. You transfer the risk from yourself to another party ie you take out insurance.
2) Risk Avoidance – you dodge the risk – eg you don’t go sky Diving because you want to avoid plunging to your death
3) Risk Reduction – you might go sky diving but you choose the provider that has the safest record and the best safety gear thus increasing your chance of a successful outcome.
4) Risk acceptance – you accept that a certain amount of people will die while sky diving but the chance of this being you is minimal.
5) Self insurance – you have the financial resources to cover yourself if anything did happen.
Ideally we all want to be in the “self insurance” mode and have enough financial resources to protect us if something happened. The truth of the matter is that unless we’re born in to money we will all at some time have to look at other ways to manage our risk
With regards to funeral insurance if someone doesn’t have the funds to cover the cost of their funeral they have the following options:
1) The family left behind pays the funeral costs –If the family are ok with that then this is a great alternative.
2) The client can start to set aside funds to cover the cost of the funeral. But what if the claim has to be made before sufficient funds are available to cover that cost?
3) Take out a funeral insurance.
It should be acknowledged that when taking out a funeral insurance policy it will be for a set amount. Costs increase and funeral costs are no different so it’s imperative that any type of insurance be reviewed regularly to ensure that the benefit meets the expectations of the client. If the client is setting aside savings at the same time the benefit may be able to be reduced of the policy cancelled altogether if there are sufficient funds available.
It should also be acknowledged that this type of insurance is usually sold to older people who would have difficulty in obtaining a standard life cover due to age and/or previous health history. Often this type of insurance is NOT assessed medically so this can be a viable option to those who are concerned about meeting the cost of their funeral.
Insurance companies work off risk vs benefit. They rely on clients who are on their books longer to offset the clients that could make a claim in a shorter period of time. We need Insurance agencies and we need them to be profitable otherwise the option of Risk Transferance is taken away from us. If you take away Risk Transferance as an option it will meant that many of us will have to adopt other risk management strategies which could mean no skydiving for anyone!
