It's your funeral, so don't let the costs rise too high

As cremation and burial expenses soar, Nargis Ahmad and Julian Knight report on the prepayment plans that can help protect your legacy

We may think the cost of living imposes a huge strain on our wallets, but what about the cost of dying? From undertakers' fees to crematorium costs and burial plot prices, the bill for being laid to rest or cremated is soaring at well above the rate of inflation.

It costs an average of £2,549 for a cremation and basic funeral service in the UK. But if you are planning something a bit more formal, the expense can be far higher. If you want to be buried, for instance, the average bill rises markedly to more than £4,000, according to insurer AXA Sun Life.

What's more, funeral costs, as with most things in Britain, can vary according to where you live. London, not surprisingly, is the priciest area because burial land is expensive and undertakers tend to have higher staff costs and other overheads. Indeed, a burial in the capital can be nearly twice as costly as one in parts of the north of England, Wales and Scotland.

In many cases, the departed will have set aside money in their will to cover the costs of a funeral. However, this will often prove an underestimate and the excess will have to be found from reduced legacies or perhaps a surviving relative's pocket.

Another option is to buy life insurance. This pays out a lump sum on death to the estate of the deceased, and part of it can be used to cover funeral expenses. The drawback with a life policy is that, with increased longevity, people can end up paying premiums for many years

A more straightforward alternative and one widely used in France and Germany, is to go for a prepaid funeral plan. Put simply, the individual buys a policy through either a one-off lump sum or monthly contributions. The payment schedules can vary, with some funeral parlours specifying that premiums should be paid within a year or two. People looking to spread their payments over a longer period can be hit by interest charges.

Some providers, however, offer continuous payments. The Co-operative, for instance, guarantees to meet the costs of the funeral for as long as the monthly premium is paid. The charges are based on your age, gender and location. As a rule, females pay a smaller premium as they have a higher life expectancy, while the further north you are, the lower the premiums tend to be. Generally, premiums are higher for people who are older.

But no matter which option you take, one message is very clear: the costs of funerals are rising.

"Currently they are going up by around 7 per cent a year, which is comfortably above inflation," says Mark Howes, the managing director of AXA Direct. "The basic funeral plan will include the cost of cremation, a casket and the death certificate, but there are other things that may not be covered, such as transportation for relatives in a limousine, a headstone and the cost of a wake. When you add in probate and legal fees, this can mean several thousand pounds," he says. "So make sure you know what the plan will give you at the point of need, and budget for the limo and wake if you want to include these."

"Disbursement costs" must also be taken into account. This term refers to all items and services that are supplied by someone other than the funeral director. Common disbursements include the doctor's fee for signing off a cremation, clergy costs, and crematorium or church charges.

All those extras are worth considering carefully as recent research by Mintel shows that disbursement costs can add as much as £2,000 to the price of a funeral. "We have no control over third-party costs," says Dominic Maguire from the National Association of Funeral Directors. "Crematorium charges have gone up as crematoriums have to follow European legislation on reducing mercury output, and we have had to pass these charges on to customers. Also, doctors now have freer rein over what they charge for a death certificate."

However, many of the funeral plans available on the market include a contribution to these third-party costs. Often, a payout figure is outlined in the policy document at the outset and this rises in line with the retail price index over time. But with funeral costs currently beating inflation, it is possible with most plans that when the funeral does take place, there will be a balance to pay. In addition, the longer you hold the plan, the more likely it is that the disbursement costs will escalate away from what the plan actually pays out.

The Co-op, among other providers, offers the option for people to tailor a funeral to their own specifications, such as arranging for a horse-drawn hearse or a particularly expensive coffin. In return for a higher premium, the plan should pay out enough to cover these extra expenses.

But above and beyond all this, people looking at funeral policies need to ask themselves a whole host of questions. "Does the plan allow you to choose the funeral director, or does it have to be the person the insurer decides upon?" asks Robin Gordon-Walker from the Financial Services Authority. "And will it cover expenses outside the plan?

"It's also worth asking about the cancellation policy and charges. And it's good advice to tell your family in advance, have a written record and make sure that the next of kin knows."

In uncertain financial times, another consideration is how safe your money will be once you have paid it to the funeral parlour or insurance company.

If you are considering buying a plan, it is worth checking that the company is a member of the Funeral Planning Authority, because under FPA guidelines, companies must put the money in a trust. That will ensure it is safe even if the firm goes under.

There can be occasions when a family will pay for a deceased relative's funeral costs unaware that provisions have already been made through a prepayment plan. But Mr Maguire at the National Association of Funeral Directors says some providers have a failsafe: "If the family hadn't realised there was a funeral plan, all they need do is get the death certificate and present it to the funeral provider, and the money will be paid back to the deceased's estate."

However, some financial experts argue that tying up money in a pre-paid funeral plan, although providing peace of mind, can represent poor value. Instead they advise people to pay into a savings account or other investment vehicle early on in life; over time, it should put on enough value to pay for the funeral.