A Flawed Comparison of Insurance and Prepaid Funerals - Lifebroker

Sometimes it pays to look a little more closely at a study's conclusions before accepting them as gospel. Rice Warner Actuaries has released a study that falls into that category according to Lifebroker. It compares alternative methods of paying funeral expenses and concludes that consumers should be wary of using funeral insurance to cover their last expenses.

It's worth noting from the start that the 2010 study was conducted for InvoCare, a funeral service provider offering prepaid funerals through its Simplicity Funerals division. Simplicity does not offer funeral insurance at all, but its sponsorship of the study, while briefly noted, receives little emphasis from Rice Warner.

The study utilised case studies of individuals at different ages and with different needs to reach its conclusions. The case studies also considered different genders, despite the fact that gender is irrelevant to both prepaid and insurance pricing, in order to "reflect the different life expectancies of men and women," according to the study.

The study compared only two options. It used the Guardian Plan as its prepaid example, assuming a funeral cost of $6,000 and inflation at four percent annually. Although an installment plan is available, the study assumed that payment would be made in a lump sum. When considering insurance, the study used only one product, the InsuranceLine Funeral Plan offered by Tower Australia.

Perhaps Rice Warner chose that product because it made it easy to argue the best possible case for prepaid plans. While the study noted several advantages and disadvantages of the two options, it chiefly focused on cost, calculating the time it would take for the cumulative cost of insurance to overtake the amount that would be paid out under that particular policy.

For example, it considered the case of "Jill," a 70-year-old woman who purchases a policy covering $6,000 of funeral costs. According to Rice Warner's calculations, insurance would be a bargain for the first eight or nine years of the policy, but, after the ninth year, total cost would begin to surpass the plan's benefit.

Even the InsuranceLine product has some advantages. Premiums are low for younger people, discounts are available for multiple policies and the policy can be a bargain in certain circumstances.

In fact, consumers have many options, and some companies offer policies with even more favourable terms, but the study does not consider policies other than InsuranceLine. Some products stop premium payments at a specified age. Others collect premiums only until the insured amount has been reached. Those features might have tipped the scales heavily in favour of insurance had they been considered.

In addition, the study ignores alternatives like funeral bonds, ordinary life insurance policies and designated savings accounts.

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