When a death leads to debt

Edward West
2015-06-15 07:53
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“AROUND 85% of people’s debt problems start with a death in the family,” says debt counsellor Deborah Solomon.

In spite of a relatively high penetration of funeral polices, Solomon says the cost of death in families is plunging many middle to lower-income earners into debt spirals from which they cannot escape.

“It is not only the cost of the funeral, but the expatriation of the body and looking after the dependants when a breadwinner dies that is creating a financial burden,” says Solomon who explains that although many households have some form of funeral insurance, it is not sufficient.

“If a senior member of the family dies, the funeral has to be in line with his or her position within the family. Those costs can be as high as R60 000.”

Financial adviser Frank Magwegwe of Momentum says the amount spent on funerals is a concern, with “big dignified funerals” becoming the norm as people view a small funeral as undignified and showing the family doesn’t have money.

“Funerals also attract many people because of the cultural view that ‘unless you come to my funeral, I won’t come to yours’,” says Magwegwe.

He adds that there is also the social pressure of the “after-tears” party that comes after the burial.

The research paper “Paying the Piper: The High Cost of Funerals” in South Africa, found that on average, households spend the equivalent of a year’s income on an adult funeral. Around a quarter of the funeral costs are covered by formal or informal insurance. The authors, Anne Case Anu Garrib, Alicia Menendez and Analia Olgiati, say that the impact of Aids and the increased mortality rate of economically active South Africans is a major cause of financial pressure around funerals.

Avoid death from being a debt trap

How do you prevent death from being a debt trap?

Magwegwe says financial planning is vital. “A good financial adviser would ask the consumer whether the amount of cover would be sufficient to bury loved ones with dignity, and what are the provisions for the family after the burial so that you still have food on the table and children continue to go to school,” says Magwegwe.

He gives some tips to consider before buying a policy.

• Have both funeral and life insurance. Funeral cover that is not underwritten (no medical questions) is more expensive than a life policy that is underwritten. Don’t use funeral insurance as life cover to support the dependants.

• Ensure you have sufficient funeral insurance that will cover all the major costs, during and after the burial. Some life insurance policies pay five percent to 10% of the life cover within 24 hours of a death to assist with expenses, for immediate family only.

• Plan around those family members whose funerals you would be expected to contribute towards.

• For lower to middle-income earners, the best way to prepare would be for an extended family funeral policy. However, for upper-income consumers, self-insurance probably makes more sense.

• Invest the monthly amount that you would have used for funeral insurance for extended family members and contribute cash on request.

• Don’t borrow money to pay for funeral expenses. You can’t honour the dead by getting into debt.

• Plan a funeral in line with your budget. Avoid the pressure of a big funeral and “after tears”.

• Keep in mind the costs of looking after the dependant in the event of the breadwinner’s death. Some funeral insurance products now include a grocery benefit for a period of up to 12 months after the funeral so at least the family receives monthly voucher to purchase groceries.

Some new funeral insurance products, such as with Liberty, include an education benefit that pays for the children’s education in the event of the death of a parent.

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