Dead loss: Is funeral insurance worth the money?
Dying isn’t something any of us like to think about it, let alone discuss. But there’s little doubt shelling out $15,000 for a funeral while grieving the loss of a loved one just compounds the pain.
The fact is funerals can really be that expensive. According to Canstar, it can cost anything from $4,000 to $15,000, depending on the ceremony.
And that's how funeral insurers hook you. They know you don’t want you to leave your loved ones with a hefty bill after you die, so they target your good heart: cue endless adverts about the importance of not being a burden.
But is funeral insurance worth it? What are the benefits and possible pitfalls? How can you make sure you’re not paying more than it’s worth?
Funeral insurance at a glance
Funeral insurance is a type of life insurance that pays out a lump sum when the policyholder dies, to help cover funeral costs. The benefit amount is usually between $5,000 and $15,000, depending on the insurer and the level of cover you choose.
Funeral insurance has been around for centuries, with the first known policy dating back to Ancient Rome. These "burial clubs" were used to provide money for the burial of members who had died.
The modern version began to emerge in the 19th century as a way to help pay for the increasingly expensive cost of funerals.
Today, it is available from a variety of insurers and can be an important part of ensuring that your final arrangements are taken care of. The cost of premiums depends on different factors:
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- Age of the insured
- Smoking history
- Payout amount
- Type of premium – stepped or level
- Insurance provider
For example, if you’re aiming for a $10,000 insurance cover and you're 50 to 54 years old, you could be paying $52.96/month if you’re a non-smoker and $54.47/month if you smoke. If you’re a 55 to 59-year old non-smoker, your average monthly premium is $64.60, or $66.78 if you’re a smoker.
Because there are many factors that go into calculating a funeral insurance premium, it’s always a good idea to compare quotes from different providers to find the best deal.
The Australian Securities and Investments Commission (ASIC) also highly recommends that you read any important documents before making a decision, such as the Product Disclosure Statement (PDS) and the Target Market Determination (TMD).
What type of insurance is best?
Do you take out life insurance, funeral insurance, or both to help ease the financial burden on your family when you die? That depends on your needs, as well as those of your family.
Life and funeral insurance are similar in many ways. Both demand regular payments. Both will give your family a payment when you pass away. In addition, both will assist with some of the financial strain that may arise after you die.
There are significant contrasts, however, such as eligibility, the amount of cover available, and the intended use of the payment. Understanding these distinctions can help you decide whether a particular policy is best for you and your family. Consider the following:
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- Age - Life insurance is more affordable than funeral insurance as you age.
- Health - If you’re young but not in great health, life insurance may be more expensive than funeral insurance.
- Expenses - If funeral expenses are your only worry when you die, funeral insurance is your best bet. Most, if not all, funeral insurance policies have a maximum payout benefit of $15,000. Life insurance, on the other hand, can be hundreds of thousands of dollars and, at times, millions.
There are two types of funeral insurance. One is the prepaid funeral insurance or funeral plan, where you pay in advance for your funeral service. You buy this type of cover from a funeral home either in instalments or all at once. It covers only funeral expenses.
The other one is final expense insurance. This is a policy that you buy from an insurance company. Your beneficiary will receive the funds after your death and can apply them to other costs besides funeral expenses, such as medical bills or legal fees.
Why take out funeral insurance?
There’s backup
One of the main reasons people take out funeral insurance is because they don't want to leave their family with a big bill when they die. According to ASIC, a funeral will include the following costs:
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- Funeral director fees
- Transport
- Coffin
- Death certificate
- Permits (for example, for a burial at sea or on private land)
- Burial or cremation
- Cemetery plot
- Other expenses such as a celebrant or clergy, flowers, newspaper notices and the wake
If you have funeral insurance, your loved ones won't have to worry about how they're going to cover the cost of your funeral. In addition, many policies also offer a lump sum payment that can be used to cover other expenses, such as medical bills or outstanding debt.
It forces you to save
It also forces you to save for a major expense, although it is on behalf of your beneficiaries rather than yourself. In many cases, people do not have the money set aside to cover the cost of a funeral, and as a result, they end up going into debt or putting off other important arrangements to pay for their family member’s funeral.
By taking out a policy, you can rest assured that your loved ones will not be hit with the financial burden of your funeral. In addition, funeral insurance can help to provide peace of mind in knowing that everything has been taken care of in advance. For many people, this type of cover is an essential part of their financial planning.
It’s easy to access when needed
Funeral claims don't take long to process, unlike other life insurance claims, which can take weeks or even months. With funeral insurance, your loved ones will have the money they need to cover your funeral expenses within a few days of your death. If all the correct documents are submitted as requested, your family can get the benefit payout in one to two days.
Major pitfalls of funeral insurance
Rising premiums as you age
As mentioned earlier, funeral insurance premiums are based on your age, so they increase as you get older. This means that the policy can become more and more expensive as time goes on. If you end up on a pension, you might not be able to afford it.
No refunds
Funeral insurance is not a savings plan. If you’re not able to keep up with payments, your policy will be cancelled and you won’t get a cent back. Refunds are only available within the 30-day cooling-off period. If you’d like to cash in your policy, you have to reach the early payout date first, which is usually when you’re 80 to 85 years old - and is only offered by some insurers.
No payouts in the first 12 months
You will not be covered for the first year of your policy (unless your death is determined to be an accident). If you die within the first 12 months, your beneficiary won't receive a cent.
You could end up paying too much
You could end up paying more in premiums than you would have if you had just paid for the funeral yourself. It all depends on how long you live. This is because, for most funeral insurance policies, there’s no cap on the premium you pay.
It can affect your pension
The early payout option may have implications for receiving the age pension and other government benefits. The additional incentive derived from taking advantage of the option may be included in your assessable income.
While it is easy to understand how older people, in particular, are tempted to sign up for funeral insurance, it is often a very bad decision for their circumstances.
A better option might be to sit down with your loved ones and look for other ways to pay for a funeral. For example, you can nominate a bank account where you put a similar amount of money aside each month to cover expenses in the event of your death.
These are uncomfortable conversations but really important ones. This approach will also mean you can access this money if your circumstances change (for example, you are on a pension or have a more pressing medical need), and your family can easily access it if they are named as beneficiaries.
But if you're dead set on taking out a policy, here are our top tips.
Top tips when taking out funeral insurance
Consider your age and health
The younger and healthier you are, the cheaper your premiums will be. But you could also end up paying premiums for years before you need to make a claim. Consider taking out a policy only if you have health issues and struggle to get affordable life insurance, or cannot get insurance at all and your life expectancy indicates you have less than five years to live.
Check the cost of funeral vs cost of insurance
If you base the calculation on Canstar’s average premium data (see above), you could be paying a total of $16,585 by the time you’re 80 for $10,000 cover if you start paying for funeral insurance when you’re 50 to 54 years old. That’s if you’re a non-smoker. If you smoke, it could cost you as much as $17,043. A life expectancy calculator can help you work this out.
Be on the lookout for red flags
Funeral insurance is not without controversies. While shopping for one, avoid:
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- Pushy sales pitches - Locking you into more than you can afford
- Market pressure - Lots of advertising urging you not to be a burden. There are plenty of funeral insurance advertisements on daytime television, targeting the elderly and the vulnerable. The West Australian says funeral plans are often more beneficial for funeral companies than the people buying them.
- Misleading consumers at point of sale - Financial Rights Legal Centre reports: “In the cases we’ve seen, vulnerable consumers are being misled about the costs of the premiums. In particular, when they enter these contracts over the phone, consumers aren’t being told that the premiums will rise or are not being told the extent by which they will rise.”
- False assumptions - You generally don’t get the premiums back if you cancel the contract but some salespeople will tell you otherwise. Refer to the fine print always.
- Fraud - In 2020, ASIC sued the Aboriginal Community Benefit Fund after it misled Aboriginal people to believe they were contributing to an Aboriginal community-run fund that would help pay for their burials. In reality, “the premiums were not paid savings nor was the plan an investment product. The payments were not for a purpose: the payments were directly to ACBF as a corporation. There was no fund, no trust fund and no trust”.
It’s also a good idea to understand the psychology of sales so you know which products to avoid.
How funeral insurance works
In general, funeral insurance is paid for with fortnightly or monthly, non-tax-deductible premiums, and when you die, your insurance provider will pay a lump sum to your family, which they can get as soon as the required documents (more on this later) are completed.
There are two types of insurance premiums: level or stepped.
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- Level premiums - These are more pricey at the beginning, but they don't get more expensive over time. Premiums are based on your age and smoking status and are set for the rest of your life unless the premium increases with inflation.
- Stepped premiums - These will increase as you get older, as an insured event such as disability or death becomes more likely.
You must pay funeral insurance premiums for as long as you live, although some insurers, such as APIA, offer an early payment benefit that allows you to cash it in early – once you’re over 85 – with an immediate payout of 120 percent of your average funeral cover.
A family can also take out insurance on your behalf. Just make sure they have your consent.
What happens when I die?
It’s important when you take out a funeral insurance policy to make it easy for family or friends to access it. You are trying to avoid compounding their grief. So make sure that you have nominated a person who will receive the money after you die. Tell them about the policy and ensure they can find the relevant documentation easily.
It might even be helpful for them to speak to your insurer while you are still alive so they know exactly what the process is, rather than have to come to grips with it while they are grieving.
Your nominated beneficiary(ies) — or a legal guardian if the beneficiary is under 18 — will need to contact the insurer to make a claim. They will need to provide documents such as:
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- Completed claim form
- Proof of death, such as a death certificate
- Proof of identity and/or relationship to you
Once the claim is approved, the insurer will pay out the benefit amount to the beneficiary, not the funeral home.
If you don’t have a beneficiary, the payout will be given to your estate or any person the insurer is permitted to pay. It could also end up in ASIC’s pool of unclaimed money, so it really is important to have your affairs in order.
What if I have an issue with the insurer?
If your insurer is causing problems, you can lodge a complaint with the Australian Financial Complaints Authority (AFCA), the Australian Competition and Consumer Commission (ACCC) or the professional association the company is a member of, such as the Australian Funeral Directors Association (AFDA).
If unsure where to go, tell us and we will handle your complaint for you.
