Funeral insurance vs prepaid funeral plan: What's best for me?
FUNERAL PLANNING

Funeral insurance vs prepaid funeral plan: What’s best for me?

Ross Nicol, marketing intern
  • Ross Nicol
  • Writer, Bare
  • February 19, 2021
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At first glance, funeral insurance might seem like a smart way to plan ahead and save your family from future stress. But only one in three premiums are ever paid out. That means most families won’t ever see a cent back from the money forked out over the years. There’s even been a royal commission into it.

In contrast, a Bare prepaid funeral is a smarter alternative to funeral insurance. A prepaid funeral is not an insurance product. That means once your arrangement is paid, there are no more charges. 

In this article, we explain the differences between funeral insurance and a prepaid funeral plan so that you can make the most informed choice about planning ahead without getting ripped off.

How does funeral insurance work?

Understanding how funeral insurance works can be confusing. It’s inconsistent between providers and premiums generally go up as you get older.

Funeral insurance is a financial protection that provides your family or nominated beneficiaries with a lump sum payment to pay for funeral expenses when you die. Policyholders usually made either fortnightly or monthly payments in exchange for cover ranging between $5,000 and $15,000.

It is important to understand that funeral insurance is NOT a method of saving for your funeral costs. Instead, policyholders are buying insurance to cover expenses to the value of what a funeral may cost in the future, rather than the cash being held in a bond or savings account in their name, for future access.

With a funeral insurance premium, there is no requirement that the money will be used to pay for your funeral. The beneficiary has complete discretion over how the insurance payout is spent. It might not end up being used for your funeral at all.

This is where a Bare prepaid funeral plan differs. When you finish paying off your plan – whether it’s an upfront payment or instalments over two or five years – there’s no extra funeral expenses or fees that you or your family will ever need to make. And a prepaid funeral plan is a guarantee that the arrangement will cover the total cost of your funeral. It doesn’t matter if it’s needed within five months, or 50 years. 

Who is eligible for funeral insurance?

Any Australian resident over the age of 18 can take out a funeral insurance policy, as long as they meet the provider’s eligibility criteria. 

Who is eligible to take out a funeral insurance policy?

Most funeral insurance policies are subject to a set of medical or lifestyle criteria. Some applicants may be required to undergo medical testing or provide blood tests as part of the provider’s screening process. Others are less stringent and guarantee approval of any Australian adult up to 79 years of age, without needing paperwork or medical screening. 

In contrast, a Bare prepaid funeral plan is available to any Australian resident. There is no eligibility criteria.

Who is eligible to claim a funeral insurance policy?

Funeral insurance policies differ between providers in the way eligibility to make claims are determined. Many providers have strict requirements that must be met before any payout is awarded to a policyholder’s nominated beneficiaries. 

Before taking out a funeral insurance policy, or deciding if you should continue paying a current premium, It’s important to understand what is covered and what is not. 

Policies are generally subject to the following clauses:

  • A 12 month ‘accidental death only’ period. This means that if you die within the first 12 months of taking out your funeral insurance policy, your beneficiaries will not be paid out unless it was an accident. So if the death was a result of a medical condition – for example, cancer or heart attack – or if it was a suicide, the policy won’t be paid out.
  • No payment of a terminal illness benefit if you are diagnosed with a terminal illness within the first 12 months of the policy being held or reinstated.
  • No payment of an accidental serious injury benefit if the policyholder is diagnosed with blindness, deafness or even in the consumption of alcohol or drugs. 
 

In contrast, a Bare prepaid funeral plan guarantees that the costs of a funeral will be covered in any circumstance, regardless of how the person died. 

Do costs increase over the years?

The cost of funeral insurance is calculated based on several factors, including your age, gender, where you live and whether or not you smoke. Prices also vary between providers and whether you choose a ‘stepped’ or ‘level’ premium.

Stepped insurance premiums are calculated according to your age, gender and sum insured each year the policy renews. That means while you will pay a lower premium to begin with, your premiums will increase every year.

For example, the average price of a funeral insurance policy at age 60 is $14.98 per week. But at 70 years, it almost doubles to $26.33 per week, according to figures obtained by comparison website Finder.com.au. Add on another 80 years and that weekly premium skyrockets to $59.61.

Table showing the average price of a funeral insurance policy at various ages
The average price of a funeral insurance policy at various ages (at June 2020). Source: Finder.com.au

 

This is why funeral insurance premiums generally become far too expensive for pensioners to maintain. And once they stop paying, they will lose every dollar they have already forked out. 

On the other hand, level insurance premiums are a set amount when you initially take out the policy and the amount won’t increase as you get older. The downside to these premiums is that they are generally higher than stepped premiums, so it’s worth price-matching.

In contrast, the average price of a prepaid funeral with Bare Cremation is about $22.16 a fortnight, paid off over five years (price differs depending on location). Alternatively, you can pay upfront for an average of about $2,500. And once it’s paid, it’s paid!

How do policies compare?

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.

Australian Funeral Insurance Providers
Comparison of Australian funeral insurance providers at November 2019.

 

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.

You can get an estimate for yourself, with out handy funeral insurance calculator. Just click the button below. 

What else you should know before buying funeral insurance

As mentioned earlier, the funeral insurance sector has been investigated as part of a wider Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

The commission found that of the $300 million a year in customer’s money, only A THIRD of benefits were ever paid out. The commissioner added that Australian funeral insurance “gives little value to consumers”.

Here are some other facts you should know before paying for funeral insurance:

  • Many funds increase your premiums and policy coverage amount annually. 
  • If you cancel your policy before death (or reaching the Early Payout date if offered in your policy), you won’t get a cent back.
  • In most policies, there is no cap on what you may pay over the term of the policy. So if you live a long life, there’s a chance you could end up paying far more over the years than the benefit payout. 
  • The long-term affordability of the policy isn’t based on your current income, but the income or pension you are expected to have in the future.  

 

It’s important to be aware of which exclusions or factors apply to the policy you are considering or your current premium.

The average cost of paying off a Bare pre-paid funeral plan over five years compared with ongoing funeral insurance premiums over time. (Insurance prices vary depending on provider and policy type)

What if I’m already paying funeral insurance?

If you’re currently paying funeral insurance and considering a prepaid funeral plan, you have a few options:

The first is to cancel your policy and switch to a prepaid funeral arrangement with a funeral provider like Bare. This means you forfeit your potential payout, but it’s likely the cheapest option if you’re planning on not needing a funeral for a few years or more.  

Or instead of cancelling altogether, you might continue paying your funeral insurance premiums AND also take out a prepaid funeral plan. That way, if you’ve already prepaid your funeral, your beneficiary would instead keep the cash benefit to use however they wish – towards a mortgage, to buy a new car, a holiday, or your grandchildren’s education. 

Alternatively, you can keep paying your funeral insurance as normal, but advise your family to use some of the payout to arrange a simple cremation with Bare when the time comes. This is what we recommend if you’re expecting you might need a funeral in the next three years or so. If you prefer to wait until the time comes, we suggest putting a request in your Will or Advance Care Directive that your family applies the policy payout to cover an arrangement with Bare.

If you’d like to chat with our prepaid specialists for a recommendation, feel free to give us a call on 1800 202 901.  

How to claim funeral insurance

Each provider has a different process for how to claim funeral insurance. But generally, once the policyholder has died, the beneficiary contacts the insurance provider to make a claim. They will usually need to provide a certified copy of the policyholder’s death certificate and proof of their age at death, plus proof of their own identity and relationship with the deceased person. There is usually a claim form to be filled out and submitted for review. 

The claim is subject to the insurance provider’s discretion and it can take several days before any benefit is released.

Final thoughts on funeral insurance

Funeral insurance is a product that can provide a cash payout to beneficiaries after the policyholder dies, but only if certain criteria are met. Many policies are only of value if the policyholder dies between about two and five years. And there is no guarantee the money will be used for a funeral. 

Shockingly, only a third of policies are ever paid out. Many premiums are cancelled before they are eligible to be paid out, mostly due to the rising costs over the years and pensioners no longer being able to afford the premiums. Those families won’t ever see a cent of the money already handed over over the years.

We didn’t like how vulnerable Australians were getting ripped off with funeral insurance. So we created an affordable prepaid funeral service to take the risk out of end-of-life planning. A Bare prepaid funeral plan guarantees your funeral is paid for, taking the future stress off your family. 

Rather than recurring funeral insurance premiums, once a Bare prepaid funeral plan is paid, it’s guaranteed to be used for covering the costs of your cremation. No recurring charges beyond the length of your instalment plan and nothing more to pay later on.  

You can find out how to plan for the future without getting ripped off, by clicking the button below, 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.

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