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Funeral insurance and prepaid plans: which option works for you?

Sir Winston Churchill's coffin is carried down the steps of St Paul's Cathedral at his funeral in 1965 - HULTON ARCHIVE
Sir Winston Churchill's coffin is carried down the steps of St Paul's Cathedral at his funeral in 1965 - HULTON ARCHIVE

Funerals are big business in Britain, with around 200,000 prepaid plans sold every year, according to research from consumer champions Fairer Finance.

The loss of a loved one is likely to be stressful enough without having to fork out for all the associated costs of a funeral. The average cost of a funeral in Britain is rising and last year was £4,257 with a burial and £3,311 with a cremation, according to insurers Royal London.

Many turn to a prepaid plan which, theoretically, should cover all the costs.

But experts have warned that the industry, which is largely unregulated, is swamped with bad providers that take as much as 20pc of the total paid for themselves and leave the family having to pick up unexpected bills when the funeral finally arrives.

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Another option is to buy insurance that will cover you for the full cost of the day – but these policies have their downsides. Or, you could always pay for it yourself.

Here is Telegraph Money’s guide to funding the event and your options.

Funeral plans

Funeral plans can be paid for upfront as a lump sum, or in installments. The payments will be made to the plan provider or direct to a funeral director.

According to the Money Advice Service, the Government website, your money is either invested into a trust fund with trustees, or into an insurance policy. However, the payments you make are unlikely to cover the full cost of the day, so it’s important to question your provider on exactly what the terms of the arrangement are.

Some things that are often omitted include the cost of a burial plot, flowers or catering.

Fairer Finance has been critical of some providers for a lack of transparency around exactly what their plans cover.

The plans are also not usually regulated by the Financial Conduct Authority or covered by the Financial Services Compensation Scheme, which means if the provider goes out of business you risk losing all your money.

The Money Advice Service recommends paying for at least some of the plan on a credit card. This means you could make a claim under section 75 of the Consumer Credit Act and your credit card company may reimburse you.

Funeral plans
Funeral plans

Funeral insurance

Another option is a funeral insurance policy, also known as “over-50s insurance”. You will make annual or monthly premium payments, much like with other types of insurance, and the policy will pay out a fixed sum when you die.

However, the Money Advice Service warns that these policies often represent poor value for money.

It explains that you will have to pay the premiums until you die, or for some providers until you turn 90, which means you may end up paying more than the actual funeral will cost.

If you miss a premium then the policy will be cancelled, and you won’t be able to get a refund for the money you’ve already spent.

Pay yourself – and reduce your inheritance tax bill

One intriguing option for those who might be above the inheritance tax (IHT) threshold is to pay for the funeral yourself and reduce your tax bill.

IHT is payable on estates worth more than £325,000, with an additional £125,000 allowance in respect of the family home. These allowances can be doubled for married couples.

The organiser of your funeral can claim back expenses from your estate, reducing its overall size and the tax bill.