Dead investment: What you need to know about funeral insurance

What is funeral insurance?

Funeral insurance is a type of insurance you take out that will result in money being paid out to your chosen beneficiary at the time of your death. But it DOESN’T cover you the minute you miss a premium payment.

It is designed and marketed to you as a way for you to pay for your funeral costs now for coverage when needed, as the policies are generally for amounts a typical funeral would cost and payouts take place quickly to enable the money to be used for funerals.  

Planning now for your time of death is a good idea and saves your family extra stress at the time of your passing and their need to find the money to cover funeral expenses. However funeral insurance is often not the most secure option. Funeral insurance requires you to keep paying premiums (which often rise yearly) for the rest of your life to ensure the benefit is paid out after you pass.  It is also common for people as they age, to find that they struggle to keep up with their premiums for such a long time. Further this insurance can result in people paying more in premiums than the insurance company pays out when you die.  

In addition, there is no requirement that the money paid to beneficiaries goes towards paying for a funeral. The beneficiary has complete discretion on how to use the money paid and it may never be used for a funeral at all.

As a general rule, if considering funeral insurance keep the following in mind:

The traps of funeral insurance

There are variables between policies, but generally funeral insurance have the following characteristics you need to be aware of:

• You will not be covered for the first 12 months of your policy (unless death is deemed an accidental death), thus no benefit will be received if death occurs within 12 months.

• If you fail to pay premiums at any stage you will lose all the money you have paid into the policy and receive no benefit.

• Policies do not require money paid out to be used for funerals.  Beneficiaries can use the money on anything once it is received. The term ‘funeral insurance’ is therefore a misnomer as there is no requirement that the money be used for a funeral.

• A yearly increase in your policy cover amount and the premiums payable is common amongst policies. Be aware if this is the case with your policy.

Our article, funeral insurance vs prepaid funeral plans has more tips on making the best choice for yor circumstance.

Issues to consider before taking out a policy

• Funeral insurance is not a savings plan. If you cancel it before an insured passes away or reaches the Early Payout date, you won’t get anything back (exception applies during the cooling-off period, which is generally 30 days).

• Depending on how long you live, you might hold funeral insurance for a long time. It is important to understand that for most policies there is no cap on the premiums you may pay over the term of the policy, so you may end up paying for a policy for a very very long time.

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

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

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

• Many funds increase your policy cover amount and premiums yearly, so be aware if this is applicable to the policy you are in or considering

Australian funeral insurance policy comparison

We have 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.

These comparisons of funeral insurance are based on policies available as of November 2019 and may not relate to earlier policies that you may have signed up with.

All funeral insurance providers in the table below had:

• No payouts in first 12 months (except in the event of accidental death)
• In the event you end your policy or are unable to make payments – your funeral insurance is completely void and you aren’t eligible for any payout – including what you’ve already paid.
• In every instance the beneficiary is free to use payout funds on anything – it doesn’t have to even be a funeral!

A table summarising each provider is below:

For those people 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 funeral insurance, you may be better in keeping it. In the majority of other circumstances, there are much better options in the market to protect your family when you pass away, among them prepaying for your funeral, investing in a funeral bond, or saving incrementally in a term deposit.

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.

To learn more about prepaid cremations, visit the Bare Cremation website or call us on 1800 202 901.