RECENTLY a reader told me she had received a brochure for a funeral plan, which seemed almost to good to be true.
You paid a premium of $87 a month, which would provide a cash sum of $10,000 for your funeral, or any other expenses, when you died.
Applicants could not be over 70 years of age and there was no payment available in the first two years unless the policyholder died from accidental death.
A "feature" of the policy was that no further premiums were payable once the total premiums paid reached $10,000. That is almost 10 years from taking out the policy.
A product like this is basically a bet between you and the insurance company. If you die in the first five years you have won - if you last 10 years or more all you have done is got your capital back with no interest.
As always the odds are stacked in favour of the insurance company.
Nobody over 70 can take out this policy, yet the life expectancy for a 70-year-old male is 14.76, for a female 17.42. This means the most likely outcome for the majority of policy holders is a return of capital and nothing more.
Most senior citizens pay no tax. Therefore they can utilise high interest bank accounts without the fear of the interest being eroded by tax. Suppose a 70-year-old placed $87 every month into a bank account instead of taking out the funeral plan. If it earned 6%, they would have $10,000 in eight years and $14,000 after 10 years. If no more contributions were made it would be worth $19,000 in five more years. Clearly a much better outcome.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.
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