How to avoid the hidden traps of funeral insurance

Australians spend more than $300 million on funeral insurance premiums each year. Of all those policies, less than 20% are ever paid out, according to a 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

In this article, I'll explain some of the traps Australian seniors are finding themselves in when it comes to paying funeral insurance, and how you can avoid getting ripped off, while still planning for your future.

What is funeral insurance?

Funeral insurance is a policy designed to be paid out to your chosen beneficiary to help pay for your funeral and associated expenses when you die. It sounds like a great idea in theory, but you stop being covered the minute you miss a payment – and you don’t get a cent back.

Policies are set up to cover costs associated with a traditional ceremony. Consequently, premiums can end up costing thousands more than a prepaid funeral. Funeral insurance was originally sold to fill an important niche for people – to create certainty and comfort that when they pass away, there will be money available to cover the costs. However there are now a range of alternatives that fill this need, including a prepaid funeral plan with Bare Cremation.

How much does it cost?

The average cost of funeral insurance is about $50-$100 per month. Your specific premium may vary based on your age, sex, health and the amount of cover you purchase.

Premiums generally increase over time as you get older, which can become too expensive to maintain. There are many different providers to choose from and it pays to shop around.

In contrast, the average cost of a funeral in Australia is about $7,499 according to finder.com.au and that price is expected to skyrocket past $16,000 in the next 15 years. In comparison, *the national average price of a prepaid funeral with Bare is around $3,300 at the time of writing.

The traps of funeral insurance

To ensure the funeral benefit is paid out after you pass, you need to keep paying premiums - which often rise annually – for the rest of your life. This can result in paying more in premiums than the insurance company pays out when you die.

It is also common for pensioners to struggle to keep up with their premiums. If the payments stop, your funeral insurance is completely void. You forfeit all funds already paid and aren’t eligible for any payout – including what you’ve already paid.

Many policies are also limited to accidental death in the first two years. This means you are not covered if you have an illness.

Funeral insurance also doesn’t allow you to pre-plan your desired memorial, it simply acts as a financial payout to assist your family in paying for your funeral. Policies do not require money paid out to be used for funerals, so beneficiaries can use the money on anything once it is received. If that’s the case, why have funeral insurance at all?

Comparisons of Australian funeral insurance policies

We recently compared a number of the most common funeral insurance funds in Australia, outlining their main features to help you understand your policy or one you may be considering. The below table summarises what we found.

‍

It’s important to note that these comparisons are based on policies available as of November 2019 and may not relate to earlier policies that you may have signed up with.

What's the best option for me?

For those who specifically want to cover their funeral costs, there are only rare circumstances where funeral insurance makes sense.

Typically, if you are anticipating passing in the short term and already have an existing policy, you may be better continuing to make the payments. In the majority of other circumstances, there are much better options in the market to support your family when you pass away, including prepaying your funeral, investing in a funeral bond, or saving incrementally in a term deposit.

For many people, putting money in an actual savings account makes more sense than paying any insurance premium. Let’s do a basic comparison: Geoff and Linda, both 70 years old and in good health, have funeral insurance. Geoff pays $125/month, and Linda $95/month in premiums. If Geoff saved the same amount, he’d have $10,000 before he turns 77. For Linda, she’d have saved $10,000 by the time she’s 79.

The example above assumes that those monthly instalments amounts stay the same. In most funeral insurance products, your premiums increase over time. Also remember, that in the first year or two, there is no coverage – so there is immediately at least $1,500 for Geoff and $1,140 for Linda paid into nothing. To put that into context, those initial premium payments would have already paid off more than 50% of their funeral with a provider like Bare Cremation.

‍

‘But I’m already paying for it’

Thousands of Australians currently have funeral insurance. I speak to multiple people with policies daily. The consistent concern is that they feel obligated to keep paying, as they have already paid in a lot, and are waiting for their payout.

In many instances, they are throwing good money after bad. I understand the emotional attachment to the money they have paid, but funeral insurance should be calculated as the money you expect to pay in the future. Remember, every fortnight or month your premium is due, the balance is reset. You start on zero.

However, for those who currently have funeral insurance and anticipate their passing is likely in the next couple of years, keeping it may be the most prudent option. Ultimately it will come down to personal circumstances.

Before taking out a funeral insurance policy, consider these points:

• Funeral insurance is not a savings plan. If you cancel it before passing away or reaching the Early Payout date, you won’t get anything back.

• Depending on how long you live, you might be paying funeral insurance premiums for a long time. In most policies there is no cap on what you may pay over the term of the policy, so you may end up paying a premium for a long time.

• It is possible to pay more in premiums than the amount of cover provided by the policy. Understand the terms and conditions of each insurance contract before deciding to buy or continue to hold a policy.

• The long-term affordability of the policy, based not only on your current income, but the income or pension you are likely to have in the future. Are you sure you will be able to continue to pay your premiums for potentially a long time?

• Where available, the Early Payout option may impact entitlement to the age pension and other government benefits, and may have income tax implications. The additional benefit from exercising the Early Payout option will need to be included in your assessable income. You should consider these impacts and seek financial advice if necessary, before exercising this option.

• Many funds increase your policy coverage amount and premiums annually, so be aware if this applies to the policy you are considering, or your current premium.

You can compare your funeral payment options for yourself with our funeral insurance calculator tool here.

I hope this article helps provide a better understanding of the traps of funeral insurance policies.

You can find out how to plan for the future without getting ripped off, by visiting the Bare Cremation website here or calling 1800 202 901.

‍Please note: this article is not legal advice. You should speak with your solicitor or accountant for specific advice on your personal or financial situation

*This is the national average price of a Bare pre-paid cremation, paid up-front, correct at February 2024. Please note that prices vary depending on location and installment frequency and are subject to increase over time. However once a pre-paid plan is locked in, it will remain that price for the duration of the instalment plan. For an accurate quote and cost breakdown for your location, please visit our website.