What is an underwriter and does your burial society need one?
As it can be risky for burial societies to rely on a group savings account to fund members' funeral payouts, it's worth considering taking out insurance, says Tyvision Media
More than 4-million South Africans belong to burial societies, making them an important part of our country's culture.
A burial society can be defined as a “single-purpose stokvel”. Like a traditional stokvel, such societies are made up of members who regularly contribute money towards a communal “pot”. However, these funds are collected with a sole goal in mind: providing a dignified funeral for the society's members and their loved ones (“dependents”).
These societies are usually governed through a constitution. This sets out the rules of their operation, including the monthly contributions, expectations from members and the financial benefit that will be paid out to members for funerals.
Burial societies often look to their collective savings to pay the stipulated financial benefit to members. However, the use of group savings accounts for this purpose can be risky. After all, savings accounts are exactly that, accounts designed for savings, not for “insurance” payouts — that's where underwriting comes in.
An underwriter is a registered financial service provider (FSP) that calculates and takes on the financial risk of a client in exchange for a monthly payment called a premium.
The importance of underwriting
Consider this scenario: Burial society A has 20 members, who each have nine people “covered” under their “policy”; this means the society is covering 200 lives in total.
Each member has to contribute R100 per month and, in return, they get to claim a financial benefit of R15,000 per funeral. (Often these amounts are not based on any actuarial calculations that take into account factors such as the ages of the members and their “dependents”). This gives the society a monthly collection of R2,000 in total.
So far, the burial society has collected R150,000 in a group savings account. It seems like they're in a good health financially, right?
Then the worst happens: over the next two months there are 11 deaths and so 11 “claims” for funeral payouts. With just over R150,000 in the bank, the society is only able to “settle” 10 of these “claims” in full. Their group savings account is now also depleted. The next month, there's sadly another death and another “claim” that can't be settled.
It's likely the “claimants” who did not receive their funeral payouts would not have kind words for the members who previously received their full financial benefits. Ultimately, this could lead to serious conflict and possibly even the collapse of the entire burial society.
However, had burial society A's financial risk been underwritten by an appropriately registered FSP, this story would have had a very different ending.
In that case, provided all the members of the burial society had adhered to the rules of the underwriter's policy and their premiums were up to date, the underwriter would be obliged to settle ALL valid claims, including those that came after the funds in the societies' group savings account had been exhausted.
Finding a credible underwriter
Finding the “cheapest” premium is not the only thing that burial societies should consider when selecting an underwriter. In some cases, unregistered and unauthorised organisations and individuals offer funeral policies at such low premiums that it's unlikely they'd be able to pay claims at the time when the money is needed most.
For this reason, burial societies should always ask policy providers these questions:
- Are you registered and authorised with the Financial Sector Conduct Authority (FSCA)?
- Does the policy have an underwriter?
Burial societies also need to fully understand the financial choices they are making and their implications, which is why it's advisable to consult an expert before making any monetary decisions.
Lack of access to financial information and poor administration issues are a challenge for many burial societies. Tyvision Media — producer of the financial literacy TV series Ke Zaka: Stockvel Insights on Business Day TV — can assist groups with administration and provide the relevant, credible and reliable information they need to make the best possible decisions to reach their financial goals.
Do you or your burial society have financial questions you need answered?
Tyvision Media can help: simply fill in this online questionnaire or submit your questions, along with your contact details, the name of your burial society and the town in which it's based, via email (admin@tyvisionmedia.co.za), WhatsApp or voice note (081 596 1065/067 742 0534).
Tyvision Media is hosting an informative financial literacy event for stokvels and burial societies at the Imbizo Lounge at the University of Johannesburg's Soweto Campus from 9am to 1pm on July 27. For more information about this event, call or WhatsApp 081 596 1065 or 067 742 0534.