The worst insurance. Ever.

Back in the days it was common to buy a funeral insurance for your kids. I got one. I can see the feel-good emotion behind it but let's talk numbers and see whether such insurance is a smart money decision. 

Penny wise...

I can't be bothered to look back into my own over 40-year old forms to do the math on my own policy. Let's pretend we buy a new one and see what happens. Let's assume we buy an insurance policy for our new born. No need to congratulate us, it is a hypothetical child.

I only checked the situation at Yarden, one of the bigger players on the Dutch market. We'll be paying €5.63/month for 30 years to get  paid for an €8000 funeral. 

At first sight not a big monthly amount. If you would invest this amount yourself in an ETF you would end up with €5486. This is assuming a 6% annual return. So Yarden is offering more than a modest ETF can bring you. €2027 of premium payments gives you an €8000 funeral. 

Pound foolish!

But what happens after the 30 year payment period? At Yarden the payments stop after 30 year but the amount you'll get for your funeral remains €8000, however long you may live. Off course we don't know at which age we die. The average for today's newborn is well over 80. 

This is where the calculation starts to look different, very different. If you would leave your €5486 invested in an ETF and have an average return of 6% for 50 more years (until the age of 80), you'll end up with €100563. The opportunity loss is enormous!

Calculations with averages are nice but in real life this is not what happens. You should obviously check whether you can carry the financial burden of the black swan event (a way-before-average age funeral). However, many people also have partner pensions or life insurances or savings. Or all of them. So that it quite likely more than enough financial backing to decide not to go for a funeral insurance policy.

Do the math and act on it

The friendly people of Yarden only give back half of the money you paid if you want to back out of the deal while still alive... In the example above this would be half of €2027 once you are over 30. With - in my case - a life expectancy of around 40 years left, you should still decided to take half the money you put in and run. A 6% return on €1013 will yield €10368 in 40 years. 

So as of today, I am out of there.