Traditional funerals commonly cost upwards of $10,000 - and the price is increasing each year. Financially planning ahead with funeral bonds or a prepaid funeral plan ensures you are prepared for the inevitable.
Even if the death was expected, the cost of the funeral often takes families by surprise. The unfortunate reality is that not everyone either has savings or enough funds in their estate to cover funeral costs when they die, placing a third of Australian seniors under financial hardship.
The good news is that there are a few ways you can plan today for your funeral – whether it’s not needed for months, years, or decades.
Setting aside funds to pay for your funeral offers peace of mind, knowing you are reducing the financial burden on your loved ones when it comes time for them to plan your funeral. Understanding the available options available will also help you to make well-informed decisions about how you want to be farewelled.
In this article, we explain the advantages of preparing for your funeral while you’re still here. We highlight the difference between funeral bonds, funeral insurance and prepaid funeral plans.
What is a funeral bond?
Funeral bonds are managed investment products that help you save towards the cost of a funeral. The money invested is held in an independently managed funeral fund that can only be released after the accountholder has died.
You can contribute to a funeral bond either with a lump sum or by regular monthly payments until your chosen bond value has been reached.
It can get confusing because the funds paid into a prepaid funeral product are usually held securely in a funeral bond, in the customer’s name. For example, with a Bare Prepaid Funeral, the customer’s funds are held in a funeral bond with Lifeplan Australia Friendly Society until they are needed to pay for their funeral.
How do funeral bonds work?
Funds held in funeral bonds are invested in your name, for the specific purpose of being used towards your funeral expenses. Funeral bonds can only be withdrawn upon the death of the accountholder – so the money can’t be touched until they have died. Any remaining funds will go into the deceased person’s estate.
The terms of each funeral bond will depend on the specific product. Each funeral bond will have a product disclosure statement that explains how it works.
Pros and cons of funeral bonds.
Advantages of funeral bonds.
The companies that manage funeral bonds are regulated by Australian laws. They are a secure option for people who want to save for their funeral but don’t want to think about planning the actual service - which people can find confronting.
Funeral bonds encourage saving because funds cannot be accessed for any reason other than to pay for the accountholder’s funeral.
The funeral bond is an investment. The funds should continue to grow over time, at a return that is higher than if the money was just sitting in a regular savings account. Additionally, funds invested into funeral bonds are not subject to Centrelink assets and income tests for Australians on the Aged Pension, up to a certain amount. Currently (at July 1, 2021) the Centrelink funeral bond threshold amount is $13,500. The Department of Social Services reviews the Funeral Bond Allowable Limit on July 1 each year. Our article Prepaid funerals and Centrelink explains more.
Another advantage of funeral bonds is the freedom to nominate your preferred funeral director, if you wish. You also have the flexibility to change your preferred funeral director at any time.
Disadvantages of funeral bonds.
While they are a great option to save money towards funeral expenses, funeral bonds are not guaranteed to cover the total cost of your funeral when the time comes.
Funeral bonds should earn interest over the life of the investment, which is added to the capital. However, the amount is not guaranteed to keep up with inflation. Your specific funeral fund may not grow quickly enough to match rising funeral costs over the years. Before considering investing into a funeral bond, be sure to consider that possibility.
On the other hand, a prepaid funeral plan is a safeguard against rising funeral costs over the years. Prepaid funerals guarantee the farewell you have pre-planned, as you are paying for the actual funeral service upfront, at today’s price.
With a Bare prepaid funeral, you can either prepay upfront, or by monthly or fortnightly instalments. Once your arrangement has been paid in full, there is nothing more to pay regardless if the funeral is needed in six months or 60 years.
Funeral bonds vs funeral insurance.
Older Australians looking to plan ahead may also be weighing up the option of investing money into funeral bonds vs funeral insurance.
The difference between funeral bonds and funeral insurance is that with a funeral bond, your money is held securely in your name until it is needed for your funeral. On the other hand, funeral insurance requires the policyholder to keep making payments usually for the rest of their life.
Funeral insurance premiums usually increase as you get older, making it unaffordable for many pensioners. If you stop paying for funeral insurance at any stage, the policy is cancelled and you lose every cent you have paid towards it.
That means, if you live a long life, you could be paying much more into funeral insurance over the years than the payout amount.
For example, if you pay a $100 monthly funeral insurance premium for $10,000 cover, you would have paid more than the $10,000 payout amount within nine years (and that’s without factoring in any premium increases over the years). If you live longer than the nine years – good for you! You’ll just be out of pocket more than $1,200 each year. And if you cancel your policy, not a dollar of that money will be paid back to you or your estate.
Funeral bonds aren’t as financially effective as a prepaid funeral (which pays for the actual service at today’s price, regardless of inflation over the years). However, funeral bonds can be a good option for Australians looking to save for their funeral without needing to choose a funeral director or pre-plan their funeral service. Just set funds aside and leave the planning up to your loved ones when the time comes.
Final thoughts on funeral bonds and prepaid funerals.
Funeral bonds and prepaid funerals are secure options to plan ahead for your funeral and reduce some of the future financial stress from your family who will be planning your funeral. As the funds are held in your name until the time it is needed for your funeral, either of these options are safer than funeral insurance – which is essentially a scam. It's worrying that only a third of Australian funeral insurance policies are ever paid out.
The benefit of a prepaid funeral, rather than a funeral bond, is that you are locking in today’s price and you have a say in how you will be farewelled when the time comes. If your funeral is not needed for many years to come, a prepaid funeral ensures the service is completely paid for, despite any inflation over time.
If you are considering investing in a funeral bond, be sure to read the disclosure statement carefully, as you will not be able to access your money.
We hope this article has given you some clarity about how funeral bonds work, and the difference between funeral bonds, funeral insurance and prepaid funerals. Hopefully the information helps you to make an informed choice about planning ahead to cover your funeral costs.
If you have any questions about prepaid funerals, or you’d like to know more about planning ahead, please give us a call on 1800 202 901 or click here to get a quote online.
This article is not legal advice. You should chat with an accountant or legal professional for specific advice on your personal or financial situation.