Life insurance versus funeral insurance: What’s best?

Insurance is a safety net for our families as much as it is for us, particularly as we age. If you're weighing up life insurance versus funeral insurance, it's important to look at them in relation to your personal circumstances.

Life and funeral insurance are similar in many ways. Both demand regular payments. Both will give your family a lump sum that will ease some of the financial strain when 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.

How does funeral insurance work?

Funeral insurance is a policy that you buy from an insurance company and pay a premium for each month, just as you would health insurance or home and contents insurance. Your nominated 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. The benefit is usually no more than $15,000.

 

 

There is also prepaid funeral insurance or a funeral plan, where you pay in advance for your funeral service. You buy this type of cover from a funeral home where you pay in full at an agreed price or in installments. It covers only funeral expenses to the agreed amount in the plan, though the funeral home can not change the terms of what is covered and charge your family more when you die.

How does life insurance work?

Life insurance is also a policy generally paid via monthly premiums. How much you pay will depend on the level of cover you want and for how long, as well as your age and general health and wellbeing.

You will also need to provide personal information about your lifestyle (such as if you have ever been a smoker) and health (including any hereditary conditions). You may be required to provide evidence from your GP or specialist that you are in good health so the insurer can weigh up the risks of insuring you.

Your nominated beneficiary will receive a predetermined lump sum on your death, providing they have all the appropriate paperwork.

Weighing up the options

There are several factors to consider when deciding which insurance cover is best for you.

Your age

Both life insurance and funeral insurance get more expensive as you age. If you take out funeral insurance as a senior, you may get better value over time, though, as if you start too early you could end up paying way more than the agreed payout figure.

 

 

It can also be much harder to get life insurance the older you get. Most life insurance companies have a cut-off age, generally from 60 to 75 years, for taking out a new policy, though some will accept seniors up to the age of 79. Some life insurance policies also expire when you reach a certain age.

Your health

If you’re young but not in great health, life insurance may be more expensive than funeral insurance. On the other hand, if you take out funeral insurance when you are young and in good health, you could end up paying premiums well in excess of the cost of the policy over time.

Your expenses

If funeral expenses are your only financial concern for your family, funeral insurance is probably sufficient. Most funeral insurance policies have a maximum payout benefit of $15,000. If you still have a mortgage and other debts, or a young family to support, life insurance might be a better choice as you can choose cover at a much higher rate. This means your beneficiaries will be able to cover ongoing obligations as well as the cost of the funeral.

 

 

Don’t forget the waiting time

If you are looking to relieve immediate stress for your loved ones, funeral insurance may be the better option. It is generally paid out within a matter of days after your death, providing your beneficiary has the appropriate paperwork.

Life insurance payouts can take a lot longer, with the Australian Securities and Investments Commission (ASIC) even suing insurers such as Cbus for taking too long to process claims. Some life insurance companies will pay a lump sum to cover funeral expenses, however, while your full claim is being processed. Ask about that option.

And finally...

It is also worth remembering that you may have life insurance cover through your superannuation fund. The laws governing superannuation and life insurance changed recently though, so check with your super fund. You can either increase life insurance through them to cover expenses such as a funeral service or take out separate funeral insurance.

If you are experiencing difficulty with any insurer, make a complaint with us and we’ll help you handle it.