Funeral policies are the most popular insurance products in South Africa. They are highly lucrative for insurance companies, because of the sheer numbers in which they are sold, but they are also one of the most problematic forms of insurance for various reasons.
Traditionally their function has been to cover the costs of the funeral on the death of a person insured under the policy, but they are often bought with a broader purpose, as mini life policies.
This is because they are so easy to buy, compared with life policies which, although offering far better value for money, involve health checks, questionnaires and a high degree of disclosure of personal information. They also pay out very quickly in the case of a valid claim.
Problems arise when the policy terms and conditions, which differ from insurer to insurer, are not fully understood by the buyer. And the problems usually arise only at claims stage, after policyholders have been paying their premiums for months or years.
The Financial Advisory and Intermediary Services Act places the onus on the seller (the insurer or its representative) to ensure that the buyer fully understands a policy’s T&Cs: under what circumstances it will or will not pay out, who is covered under the policy, what happens if someone is covered by multiple policies, and under what circumstances the policy terminates, among other things.
Unfortunately, the people on the front line selling the policies, including financial advisers, insurance brokers and funeral parlours, rely for their income on commissions. The quicker the customer signs on the dotted line, the quicker they can get on to the next sale.
And so it’s probable that thousands, if not the bulk, of policies sold are neither fully explained by brokers nor fully understood by buyers. The magnitude of the problem at claims stage is reflected in the statistics of complaints to the Long-term Insurance Ombudsman: 48% of complaints received in 2022, up from 45% in 2021, related to funeral policies.
But even if a policy is fully understood by the policyholder, a Member of Parliament has raised an interesting issue: an insured person may be over-insured without knowing it, in which case is it up to the insurance company to inform him (or her) and set things right?
A quick word about over-insurance in the context of funeral cover. The law limits cover to R100 000 per insured individual per policy. However, it does not limit the number of funeral policies under which someone may be covered. For this reason the insurers themselves often place a limit in their T&Cs. For instance, there may be a clause stating that the maximum an insurer will pay out on all policies for the same event is R100 000, and claims will be treated on a “first come, first served” basis.
Something else I suspect is not explained to buyers of policies that may cover whole families is that the law has strict limits on life and funeral cover for children. According to the Long-term Insurance Act, total life cover on a child below the age of six may not exceed R10 000, and it may not exceed R30 000 on children aged between six and 14.
Last week, Nqabayomzi Kwankwa of the United Democratic Movement, an MP who is also his party’s deputy-president and chief whip, issued a notice of intention to introduce a private member’s Bill proposing amendments to the Long-term Insurance Act. His aim is to force insurers offering funeral policies to determine whether people are covered by multiple policies, and to inform policyholders if this is so, preventing disappointment at claims stage and unnecessary expenditure on premiums.
Speaking to Personal Finance this week, Kwankwa said he had received hundreds of complaints from people in his home province, the Eastern Cape. Funeral policies are peddled by the many funeral parlours in the area. These must be underwritten by a licensed insurance company, but buyers are typically not informed about the underwriting insurer, with the result that someone may be covered under multiple policies from a common insurer without realising it.
To quote Kwankwa’s notice: “This prejudices policyholders, as they are only made aware of the implications of holding multiple funeral policies issued by the same long-term insurer at the claims stage. This results in some of the funeral policies not paying out because of the benefits implications of holding multiple policies. The long-term insurers’ failure to make policyholders aware of the benefits implications results in policyholders paying a lot of money on premiums for funeral policies that come to naught.”
Whether this motion becomes law or not, I believe our insurance industry could be doing more to keep tabs on policyholders, insured individuals and beneficiaries, notify policyholders of possible over-insurance, and thereby reduce the number of funeral policy beneficiaries disappointed at claims time. I accept that logistics may be a huge obstacle, especially in rural areas, and fraud is high on funeral policies, but insurers have massive resources on their side. A concession from policyholders may be that they have to give over more personal information.
* Hesse is the former Personal Finance editor.