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Funeral Insurance

Case Study

In 2006 Mrs P took out a funeral insurance policy. She told the telephone salesman that she could afford premiums of $30.00 per fortnight. She was told that if she took a “stepped premium” the premiums would increase only by “little amounts” each year. She initially took out a policy for $7000 cover at premiums of $30.63 per fortnight.

By 2013 the premiums had risen to $62.97 per fortnight, but her cover is only $8500.

Throughout this period Mrs P’s only source of income was the aged pension. Her situation now is that after paying for her nursing home accommodation and funeral insurance, Mrs P has $10 per week to live on. The premiums are expected to rise again next year meaning that even if Mrs P could survive on $10 per week, the policy will soon take all her money after nursing home care. When that happens Mrs P will be forced to cancel her insurance policy and her premiums will be lost.

A rise in advertising by funeral insurers over the last few years has successfully convinced many consumers that they not only can but should prepare for the costs of their own funeral. We certainly understand why consumers would want to prepare for such costs, and that they may feel guilty about leaving their family with a financial obligation.

However, there are several alternative methods of paying for a funeral besides funeral insurance. Prepaid funerals, funeral bonds and life insurance are much more cost-effective options for covering your funeral costs.

The biggest downside to funeral insurance (when compared to the alternatives) is that if you miss too many payments you may lose all of the money that you have invested. Not only will you need to keep making payments over the years, but premiums usually increase with age and grow over time. Under some funeral insurance plans you will end up paying more money in premiums than the cost of an average funeral. An Invocare-funded study undertaken by actuaries Rice Warner found that a consumer who signed up for funeral insurance at age 60, who lived to 89, would pay about $85,000 in premiums for a $6,000 funeral! (Source: http://www.smh.com.au/business/funeral-insurance-plans-misleading-20121014-27kw7.html)

To estimate how long you will live, visit the My Longevity website: http://www.mylongevity.com.au/index.aspx

Case Study published by CHOICE

“Peter, aged 65, takes out funeral insurance. At age 76 the premium he has paid is similar to the amount of cover he receives but from then on premium soon add up to substantially more than the funeral benefit. By comparison, if Peter pays a lump sum today of $6000 for a prepaid funeral, he can lock in the cost of his funeral at today’s prices regardless of the time of his death.” (Source: http://www.choice.com.au/reviews-and-tests/money/insurance/personal/funeral-insurance.aspx)

Another alternative to funeral insurance is your Superannuation policy. If you have super, when you die your super fund will pay out your balance along with any life insurance included in your policy to your beneficiaries. These funds can be used to pay back your family for the costs of your funeral. (See: https://www.moneysmart.gov.au/tools-and-resources/information-for/over-55s/paying-for-your-funeral)

Buying a prepaid funeral or funeral bonds both have pros and cons, but there may be a better option for your budget than funeral insurance. For more information on these alternative products read ASIC’s report on Paying for funerals: http://www.asic.gov.au/asic/asic.nsf/byheadline/12-170MR+How+will+you+pay+for+your+funeral%3F?openDocument

Pauper Funerals: Different states have different assistance programs if someone dies and the family either has no money or no one claims the body. In NSW these are called “Destitute Funerals” and you can get more information from this NSW Fair Trading publication: http://www.fairtrading.nsw.gov.au/pdfs/About_us/Publications/ft115.pdf

In Queensland this is called “Burial Assistance”: http://www.courts.qld.gov.au/__data/assets/pdf_file/0008/84581/osc-fs-burials-assistance.pdf