In May 2010, Mrs Parata* arranged funeral insurance cover for her husband, for a sum of $20,000. In 2020, Mrs Parata contacted the insurer, because she believed she had paid more in premiums than the sum insured. She asked to stop or reduce the premiums. The insurer told Mrs Parata that the premiums were payable until her husband turned 90, and there were no options to stop or reduce the premiums.
Mrs Parata made a complaint to the IFSO Scheme. She said she was not told that her premiums could exceed the sum insured.
Because funeral insurance is a risk-based policy, the insurer takes the risk of paying a claim before the premiums paid are equal to the sum insured. On the other hand, the insured risks paying more in premiums than the sum insured. Because funeral insurance can have relatively low sums insured, the risk of premiums overtaking the sum insured increases as an insured person ages.
However, there was nothing in the policy to warn Mrs Parata of the risk.
The IFSO Scheme contacted the insurer, who offered to cancel the policy and refund all the premiums. Mrs Parata agreed to the offer.
Consumers need to understand that, sometimes, they will pay more in premiums for funeral cover than the cover is worth. This often happens when funeral cover is held for a long time. It is not a savings product and, if premiums are not paid, the cover will usually lapse