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Funerals: Insurance

Question for HM Treasury

UIN 45188, tabled on 6 September 2016

To ask Mr Chancellor of the Exchequer, if he will take legislative steps to prohibit funeral expenses insurance plans from paying out less to customers than has been paid in.

Answered on

12 September 2016

Funeral expenses insurance is a commercial product and the Government does not believe it would be appropriate to interfere in the market in the way the Honourable Member for Glasgow South describes. The respective capabilities of insurers to assess risk is a key element on which they compete and helps to ensure there is a diversity of products and efficient pricing in the market.

Insurance is a risk transfer mechanism. At a basic level insurers group together large numbers of people, who all face a similar risk, and collect money from each of them through premiums. This pooling principle lies behind funeral cover insurance policies. These protect policyholders from the risk of dying early and not having accumulated the level of savings they would wish to leave behind to cover the costs of their funeral. The premiums of those who live long enough to contribute more than they would receive in benefits from the policy are used to pay the shortfall from those who die earlier.

Therefore it is possible for those with funeral cover insurance to pay more in premiums than they will receive in benefits. An alternative option to such insurance would be to save this money which would mean an individual would not receive less than they put in. However they would then face the risk that, should they die earlier than expected, they would not have accumulated as much in savings as they would have received in benefits from an insurance policy.

It is important that consumers understand the nature of their funeral cover insurance policies. The Financial Conduct Authority (FCA), which regulates the insurance industry, has produced an Insurance Conduct of Business Sourcebook (ICOBS) in order to set the standards required of insurance firms in relation to their business. ICOBS rules include a requirement that customers are given all the appropriate information required to make an informed decision ahead of purchasing an insurance product. The rules also state that communications should be clear, fair and not misleading. This means that where there is a possibility that a funeral plan may pay out less than was paid in, this must be clearly disclosed to the consumer before they purchase the product.

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