Funerals: the best send-off needs a good plan

We all know that nothing is certain in life except death and taxes, but you can also be sure of a hefty funeral bill.

With the average funeral now costing between £2,000 and £5,000 – and rising at 7 per cent year on year – it is certainly worth considering planning ahead. But, according to new research from Confused.com, 80 per cent of Britons have no financial plans in place to cover their send-off, thus risking following the 100,000 people who were given a pauper's funeral in the past five years after dying alone, penniless or with no financial support from their families.

Pre-paid funeral plans are one way to go, locking in today's prices to ensure your family doesn't have to dig deep to cover the shortfall. The big attraction is that acceptance is guaranteed and health and medical histories are not taken into account. Plans typically cost from £2,000 up to £4,000 depending on the package you choose.

The new pre-paid funeral plan from Dignity and Confused.com, for example, costs from £3,089 with monthly payments starting at £34.12. Many will allow you to add personal touches such as favourite readings, newspaper notices, stationery for the funeral and flowers. Payment is flexible so you can usually make a one-off payment now, or pay in monthly instalments for up to 10 years, although this could cost you as much as 30 per cent extra in administration fees.

"Compared to other options, pre-paid funeral plans are a cost-effective measure as consumers can freeze costs at today's prices and are paid in line with the inflation rate," says Leanne Squires, the product manager at Confused.com.

"Ultimately, they provide peace of mind that loved ones are protected against the added stress, expense and worry of funeral planning."

Before you commit to a pre-paid plan, you need to know exactly what is included because not all costs are guaranteed, particularly if you want a burial. Funeral directors' services should be covered but providers offer varying levels of cover for external or third-party costs such as cremation, choir, doctor's and minister's fees, grave digging and a burial plot.

Age Concern, for example, only offers a contribution towards burial costs which increases in line with the Retail Price Index, while The Co-operative guarantees to cover costs for both a burial and cremation. The most basic plans may not even include a church service, or may restrict the distance they will travel to collect your body.

You also need to ask the provider whether you can cancel the plan if your circumstances change, for example, if you have arranged your spouse's funeral and later separate.

More importantly, you need to know what happens to your money if you die abroad or if the funeral director goes bust. Funeral-plan providers are not regulated by the Financial Conduct Authority – and are therefore not covered by a compensation scheme – but providers should be signed up to the self-regulatory Funeral Planning Authority, thus complying with a code of practice.

Plans for the over-50s are an alternative to a pre-paid plan, but here, too, you need to watch out for significant dangers. The most serious downside is that the longer you live, the less likely it is it will be good value. Even if you reach the point at which you've paid more than your loved ones will get when you die, you may still have to pay the monthly premiums.

"Look out for any exclusions. Over-50s plans often have a two-year moratorium, which prevents you from claiming in that time. And while some stop collecting premiums at age 90, some continue until a claim is made, which can mean that more is paid in than is paid out," says Kevin Carr from Protection Review.

Of course, this is not a savings product and all insurance products are based on pooled risk so if you are lucky enough to live a long life, the risk is that you pay in more than the sum you receive, while other people pay less.

This is not the only potential problem – if you stop paying into the policy for any reason, you could lose the entire amount, including the premiums you have paid. If you're a heavy smoker, or seriously overweight, an over-50s plan could still be worthwhile because you don't have to undergo a medical, but finding the best provider depends on your age, how much you pay in and whether you want a lump sum linked to inflation, so you need to shop around.

If you are in good health, standard life insurance is probably a better option because guaranteed acceptance plans cover everyone, which makes them more expensive. Research from consumer organisation Which? found that taking out life insurance instead of an over-50s plan could mean your loved ones end up with 40 per cent more, although these do take your medical history into account.

Even at an older age it is likely to be better value, although you will pay premiums right up until death, so always compare any over-50s plan with the best life insurance policies and ideally, get some professional help to get to grips with all of your protection needs.

Perhaps the most straightforward option for funeral planning is to go it alone and put aside cash every month into the top savings account to build your own fund. Rates for savers have been poor for some time and if you die early, you might not have enough time to save for a funeral, but you can at least access the money if you need to, instead of losing the entire payout as you would if you needed to stop an over-50s plan.

And, if you open the savings account under joint names with a family member they can use the fund for your funeral when you die.

"Consumers should get independent advice to make sure insurance and savings products are suitable for their circumstances," says John Cottrill from Which?. "For example, life insurance won't pay out if you can't work due to long-term illness, and funeral plans may not cover all costs and aren't regulated by the Financial Services Compensation Scheme."