Funeral cover will help your family cover the cost of your burial or cremation when you die. Life insurance can be used to do that too. So what’s the difference between life cover and funeral cover?

Do I need to pay for my own funeral costs?

No. You don’t have to. There’s no law that says you have to pay for your own funeral costs when you die. You could leave everything to be sorted by your family, and if they have the financial resources to cover the cost, you might choose to do that. For many people, however, the thought of leaving their family with costs that can run to several thousand pounds is an uncomfortable one, even if the family can afford it. That’s why people choose to ensure there’s money available to cover their funeral costs. That can be especially important if you have specific wishes you’d like carried out at your funeral – because anything out of the ordinary can inflate prices even more. Two of the most popular ways of ensuring your family has money to put towards your funeral are taking out funeral cover or whole of life insurance.

What is the difference between life insurance and funeral cover?

Although both can be used to pay funeral expenses, there are differences between them.

Funeral cover

As the name suggests, funeral cover can only be used to pay for funerals and associated costs. If you want to leave your family money which can be used for other purposes, choose life insurance instead of – or as well as – a funeral plan. Paying into a funeral plan is effectively paying for your funeral in advance. You could simply put the money in a savings account, but the advantage of paying into a funeral plan is that you can lock in the cost of your funeral at current rates. You may feel that’s particularly valuable when prices are rising fast.

Whole of life insurance

Life cover typically falls into two policy types: term life insurance and whole life cover. Term life insurance will pay a sum to your loved ones if you die during the life of the policy.  Example: You have a 25-year life insurance policy. If you die in year 2 or year 22 of the policy, your loved ones will receive the lump sum agreed when you took out the insurance. If you’re still alive at the end of the 25 years, neither you nor your family receive anything. Term life insurance can be extremely valuable if you have a family and a mortgage because it can help protect your family from the financial consequences of your early death. If you’re planning to use the policy to pay for your funeral costs, however, and you don’t die during the life of the policy, it won’t pay for anything.  A whole of life insurance policy is different. It guarantees an amount will be paid to your family when you die, as long as you keep up the policy payments as agreed. They could use this money to cover your funeral costs. They could use any surplus to pay for something else. They could put the whole amount to something else.

Tax, inflation and FCA protection: the differences between life cover and funeral cover

One of the main concerns people have when they ask ‘what is the difference between funeral and life cover?’ is ensuring their money is protected.

Tax

Generally speaking, both life insurance and funeral cover payouts are tax-free. The only exception to this may be if the plan is not set up in trust and the total value of your estate (which will include your life insurance payout) exceeds the Inheritance Tax threshold. With a bit of careful planning though, you can ensure payouts in respect of both plans remain entirely tax free.

Inflation

Buying funeral cover can protect your family from rising costs between the date you take out the cover and the date they need to pay for your funeral. Life cover may provide a larger sum but the cost of the funeral will be at the rates that apply when you die. To put that in context, average funeral costs are around 39% higher than they were a decade ago. Effectively freezing the price at today’s rates could be valuable unless you believe prices will drop.

FCA protection

Are funeral and life insurance cover both covered by the Financial Conduct Authority (FCA)? Life insurance policies are protected by the FCA, the regulatory body for the financial services industry, but funeral plans are not. If it’s important for you to have some form of redress if there’s a dispute over your cover, you may feel FCA regulation (and therefore a life policy) gives you a greater degree of protection. 

Can you have both a funeral plan and whole of life cover?

Yes. You can have the two separately, or you can choose whole of life cover with a specific funeral plan element, which will give you the best of both worlds – flexibility over how your family use some of the money you leave, together with protection against inflation for the funeral element. To explore which is the right cover for you, and for more help in understanding what the difference is between funeral cover and life cover, please talk to us now.