What is funeral insurance?

Funeral insurance is a type of insurance policy that pays out a lump sum upon death to cover funeral costs. While funeral insurance sounds like a secure investment and a secure way to financially plan for your funeral, it can be a risky product. Policyholders can end up paying more in premiums than the cost of the funeral itself, and some end up forfeiting their entire policy and losing everything.

Unlike prepaid funerals and funeral bonds, which are generally safer ways to plan for your funeral, individual funeral insurance policies must be scrutinised as there is a wide range of different options available to consumers.

This guide sets out everything you need to know when considering a funeral insurance policy, including:

1. What is Funeral Insurance?
2. Common Features of Funeral Insurance
3. Advantages of Funeral Insurance
4. Disadvantages of Funeral Insurance
5. How Much Does Funeral Insurance Cost?
6. Funeral Insurance Companies in Australia
7. Funeral Insurance Comparison Websites
8. Red Flags & Fine Print
9. Alternatives to Funeral Insurance
10. Is Funeral Insurance Worth It?
11. FAQs

1. What is Funeral Insurance?

Funeral insurance is a type of life insurance product that is sold directly to consumers. While the sum insured is generally much lower than a life insurance policy (as it is designed to only cover the cost of the funeral rather than providing for dependants), the cost of many funeral insurance plans can end up being quite high over their lifetime due to rising premiums.

2. Common Features of Funeral Insurance

There is a wide range of funeral insurance products available to consumers in Australia, with a variety of features. However, common features include:

• Periodic payment of a premium (usually fortnightly, monthly or annually)
• Amount of the premium payable depends on gender, age and the sum insured
• Insured sum is only payable for accidental death if death occurs within the first 12-24 months
• Premiums increase over time
• If the insured person stops making payments or cancels the policy, all premiums paid up until that point are forfeited

3. Advantages of Funeral Insurance

Compared to other funeral planning options (see section 9 below), there are arguably fewer advantages to funeral insurance. Though it’s worth noting the following benefits:

• Immediate cover (with exclusions) – Individuals are covered for the full insured amount from day one, with the exception that only accidental death is covered in the first 1-2 years of the policy. This means, for example, if you pass away after 3 years you might receive a payout that is greater than the amount of the premiums you have paid up until that point. However, in most cases, you will end up paying more in premiums than the final benefit after approximately 6 years.
• Smaller contributions – Compared to a prepaid funeral (which requires upfront payment of the funeral cost in a lump sum or installments over a few years), funeral insurance premiums require a much smaller periodic payment.
• Promotes saving – Funeral insurance policies promote a habit of contributing a regular sum towards funeral expenses. However, it could be argued that a funeral bond achieves the same result without the risk of losing the benefit if a payment is missed.

4. Disadvantages of Funeral Insurance

There are several key risks that you should be aware of when considering funeral insurance:

• Increasing premiums – Most premiums increase over time. The issue with this is that it can make funeral insurance seem affordable early on, but over time becomes much more difficult to keep up with (particularly when you are no longer working and your savings are dwindling). On average, premiums will increase 400% from age 50 to age 80.
• Premiums paid are likely to be more than the insured amount – Assuming you don’t pass away in the next 6 years, it’s likely that you will end up paying more in premiums over the life of the policy than you will be paid out upon death. According to a study by Rice Warner, if you took out a policy when you were 60 and only passed away when you were 90, you could end up paying $85,099 in premiums in exchange for a final payout of $6,000.
• Policy forfeited for missed payments – Under many funeral insurance policies, if you can no longer afford to pay premiums, you forfeit the policy and lose all premiums paid up until that point.
• Payout is not immediate – In some circumstances it can take some time before the insured amount is paid to your estate, meaning that a family member may need to cover the cost of the funeral and be reimbursed by the estate in the following months. Depending on your family’s financial situation, this may or may not be feasible.
• Only accidental death is covered for the first 1-2 years – As most policies exclude anything except accidental death in the first 1-2 years, if you pass away within that period you may or may not be covered, depending on the circumstances of your death.

Example

Sarah takes out a funeral insurance policy at 57, initially costing her a relatively small sum of $40/month. 15 years later, at age 72, Sarah is no longer working, has used up most of her savings and relies on her pension from week to week. After paying $12,000 in premiums, her monthly premium has increased to $80/month which she can no longer afford.

Following a missed payment, Jennifer’s policy is canceled and she loses the $12,000 she had contributed under her funeral insurance policy over the past 15 years.

According to an ASIC investigation, 80% of all funeral insurance policies are cancelled due to inability or unwillingness to continue paying premiums.

5. How Much Does Funeral Insurance Cost?

How much funeral insurance costs over the lifetime of the policy depends on several factors:

• Age
• How long you live for
• Gender
• Smoking status

(Note: The statistics below are taken from Canstar’s study on funeral insurance costs.)

Age and Funeral Insurance Cost

The age at which you take out a funeral insurance policy makes a big difference to the cost of your funeral insurance.

As you can see in the table below, taking out a funeral insurance policy at age 72 means that the premium you pay will be nearly 4 times more than if you had taken the policy out at age 52. However, assuming you live to 80, taking the policy out later would result in you paying less in overall premiums over the life of the policy.

Important Note: The prices above are based on a $10,000 funeral insurance policy. This means that in each of the scenarios, you would end up paying many thousands more in funeral insurance premiums than the benefit received upon death. Also, keep in mind that these calculations are only based on an 80 year life expectancy. Should you live longer than that, the total cost of premiums paid would continue to rise.

Gender and Funeral Insurance Cost

On average, women pay less than men for funeral insurance. This is primarily because women have a longer life expectancy of 84 years, compared to 80 years for men.

It’s also worth noting that the price difference grows over time, starting at around $3/mth at age 52, and growing to a difference of around $13/mth at age 72.

Smoking Status and Funeral Insurance Cost

Whether or not you are a smoker has a significant impact on the cost of funeral insurance. On average, a smoker will pay $10/month more than a non-smoker for funeral insurance.

As with the gender price difference, this price difference grows over time, starting at around $7/mth at age 52, and growing to a difference of around $16/mth at age 72.

6. Funeral Insurance Companies in Australia

There are many different funeral insurance companies in Australia, offering a range of different policies for consumers.

When purchasing funeral insurance, it is critical that you read and fully understand the product disclosure statement before proceeding. Even with the help of the funeral insurance comparison websites below, finding the right product takes time.

7. Read the Fine Print

There are a lot of red flags to look out for when purchasing funeral insurance, including stepped premiums, losing the policy for missing a payment and paying more in premiums than the value of the cover. While these terms are still more common than not, more recently, some funeral insurance companies have released products with more favourable features for consumers that do away with some of the key risks outline in section 4 above. Some of these improved features include:

Level Premiums

Level premiums are calculated based on your age when you take out the funeral insurance policy and increase only at the rate of inflation. Compared to “stepped premiums” which can start lower than level premiums, but can rise to be 2 or 3 times more expensive than the initial premium over time, level premiums provide consumers with a greater understanding of the monthly commitment required to maintain the insurance policy.

Fine Print: Even if a funeral insurance policy offers level premiums, be sure to read what this means in the product disclosure statement. Under some insurance policies, it means that premiums increase a nominal 5% year-on-year, even though the inflation rate may only actually be much lower for the year (~1.5%). While a 5% annual increase doesn’t sound like much, compounded over 30 years it can add up quite significantly over time.

Age Cap

An age cap means that once you reach a certain age, you no longer need to continue paying premiums (usually at 90 years old). While this limits the amount of premiums you will pay, you will still likely pay more in premiums than the insured sum.

For example, if you have an insurance policy with an age cap and you turn 90, you will no longer to be required to pay premiums. However, by that stage, you may have already paid $25,000 in premiums for a final payout of only $10,000.

Premium Cap

A premium cap means that once you pay a certain amount of premiums, you no longer need to continue paying premiums. Ideally, you should look for a funeral insurance policy where the premium cap is set at the amount of the insured sum.

For example, if you have an insurance policy with a $10,000 premium cap and you pay this amount by age 65, then there’s no more to pay after that point. Assuming your insured sum is also $10,000 then you will never end up paying more than your final benefit. However, it should be noted that even in this scenario, if you miss a payment before reaching $10,000, then you will still forfeit all premiums paid until that point.

Payout Guarantee

A payout guarantee means that if throughout your funeral insurance policy, you end up paying more than the insured sum, then the excess will be repaid to you upon death.

For example, if you pass away at age 90 after paying $30,000 in premiums, upon death you will receive a $10,000 payout and the excess $20,000 will also be repaid to your estate. Again, in this scenario, if you miss a payment before passing away, you will forfeit all premiums paid until that point.

Grace Period

When comparing funeral insurance policies, you should always examine the grace period for missed payments (usually around 1-3 months). If you can pay the outstanding premiums before the grace period expires you will not forfeit the policy. However, most policies provide that while any premiums are outstanding, you will only be covered for accidental death.

Overseas Cover

If you are planning on traveling overseas or even moving overseas, check your policy to confirm that you are covered if death occurs overseas.

8. Is Funeral Insurance Worth it?

Whether funeral insurance is the right option for you depends on your circumstances and the exact funeral insurance product you are looking at. Given the alternatives for Australians seeking to plan for their funerals, it’s worth exploring when funeral insurance may be worth it. Let’s first recap some of the key facts.

For the most part, funeral insurance is a risky investment. According to ASIC:

• 80% of funeral insurance policies are canceled, meaning policyholders lose all of the money they have paid
• Most policyholders end up paying more in premiums than their final benefit

While some features (such as premium caps and payout guarantees) can help alleviate the risk of paying more than your final benefit, under all insurance policies, if you become unable to pay the premium, you will forfeit the policy and lose everything you have contributed up until that point.

If you are considering funeral insurance, you must be 100% certain that you will always be able to cover the cost of your premiums until you pass away, factoring in inflation and price rises over time.

The main advantage of funeral insurance is that it provides you with immediate cover (with exclusions), with the chance that if you pass away within 6 years of taking out the policy, you may receive a greater payout than the premiums paid until that point.

At the end of the day, funeral insurance is a risk product. For funeral insurance companies to be profitable, they must take in significantly more money in premiums than they pay out in benefits. Sadly, this means that more often than not, people incorrectly estimate their ability to keep up with premiums as they age and lose their policies.

9. FAQs

Can I get funeral insurance if I am 80+?

Most funeral insurance policies are only available to people 79 years or younger. However, some insurers insure those who are over 80 years of age.

How much funeral cover should I get?

It depends on how much you expect you will need to cover the cost of your funeral. For guidance, you can refer to our Guide to Funeral Costs, and our articles on the average cost of a cremation and the average cost of a burial.

How much cover can I get?

Most funeral insurance policies allow you to insure for an amount between $3,000 to $15,000.

How often do I have to pay premiums?

Most funeral insurance policies allow you to choose the frequency of your premium payments – usually fortnightly, monthly or annually.

What happens if I miss a payment?

If you miss a payment, policies specify a grace period during which you will still be able to make the outstanding payment (usually 1-3 months). If you cannot pay the outstanding premium within that period, your policy is canceled and you forfeit all money paid for the insurance cover.

What are common payout exclusions?

Most policies have an exclusion period for the first 1-2 years which only covers accidental death. Similarly, if your policy has a grace period for late payments, you will usually only be covered for accidental death for as long as premiums are outstanding.

What is the definition of “Accidental Death”?

Each policy will have a slightly different definition, but generally speaking, accidental death is death that is the result of accidental, violent and visible means (and is not self-inflicted).

Who receives the insurance payout upon death?

It’s up to you to nominate who receives your insurance benefit and you can specify more than one person. If you do not nominate a beneficiary, the insured sum will be paid to your estate.

Are there any tax benefits?

Generally, funeral insurance premiums are not tax deductible. However, there is usually no tax payable on payouts to beneficiaries or your estate.

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About eziFunerals

eziFunerals supports individuals and families cope with end of life decisions, death and funerals. We are an independent, Australian-owned and operated company. We are not part of any other funeral company.

Our member Funeral Directors operate in Sydney, Melbourne, Brisbane, Perth, Adelaide and Australia wide. Thet are chosen for their knowledge, quality, service, personalisation and experience. They go above and beyond, and will take the time to support the family.

For more information or to make contact with a trusted Independent funeral director, call eziFunerals on 1300 236 402 or visit www.ezifunerals.com.au.

Peter Erceg

Peter Erceg is the Owner and Founder of eziFunerals. He has had a long history within the funeral industry, and is a published author of ‘What Kind Of Funeral: A self help guide to planning a meaningful funeral’. Prior to eziFunerals, Peter worked in the public sector and health industry for more than 30 years. The views and opinions expressed on posts are those of the author and do not necessarily reflect the opinions of eziFunerals and members.