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Dead money: Beware the hidden traps of funeral insurance premiums

Announcement posted by Bare 27 Aug 2021

Contributed article: By Cale Donovan of Bare aka ‘The Funeral Futurist’

Australians spend more than $300 million on funeral insurance premiums each year. Of all those policies, less than 20 per cent are ever paid out. 

Funeral insurance is a policy designed to be paid out to your chosen beneficiary to help pay for your funeral and associated expenses when you die. It sounds like a great idea in theory, but you stop being covered the minute you miss a payment – and you don’t get a cent back.

It’s designed and marketed to older Australians as a way to pay for your funeral costs now for coverage when needed. The payout takes place quickly after death to enable the money to be used for a funeral. 

Funeral insurance policies are generally for the amount a typical funeral would cost. However, a funeral insurance premium can end up costing thousands more than a pre-paid funeral. In comparison, the average price of a pre-paid funeral with Bare is aroumd $2000 (price will depend on location).

The price of an average Australian funeral costs about $7,499 according to finder.com.au and that price is expected to skyrocket past $16,000 in the next 15 years. So, planning now for your funeral can save your family the extra financial and emotional stress at the time of your passing. 

The Cost of Death report, published by Australian Seniors, reveals that almost a third (32%) of Australian families are left in financial hardship after paying for a funeral – and they take at least six months to recover from the debt.
 

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How much does funeral insurance cost?

The average cost of funeral insurance is about $50-$100 per month. Your specific premium may vary based on your age, sex, health and the amount of cover you purchase. 

Premiums generally increase over time as you get older, which can become too expensive to maintain. There are many different providers to choose from and it pays to shop around.

The traps of funeral insurance

To ensure the funeral benefit is paid out after you pass, you need to keep paying premiums - which often rise annually for the rest of your life. This can result in paying more in premiums than the insurance company pays out when you die. 

It is also common for pensioners to struggle to keep up with their premiums. If the payments stop, your funeral insurance is completely void. You forfeit all funds already paid and aren’t eligible for any payout – including what you’ve already paid. 

Many policies are also limited to accidental death in the first two years. This means you are not covered if you have a terminal illness.

Funeral Insurance doesn’t allow you to pre-plan your desired memorial, it simply acts as a financial payout to assist your family in paying for your funeral. Policies do not require money paid out to be used for funerals, so beneficiaries can use the money on anything once it is received. If that’s the case, why have funeral insurance at all?

Comparisons of Australian funeral insurance policies

We recently 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. The below table summarises what we found.
 

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Caption: Comparison of Australian funeral insurance providers at November 2019.


It’s important to note that 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.
 

Is funeral insurance the best option?

For those 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 continuing to pay your premiums. In the majority of other circumstances, there are much better options in the market to support your family when you pass away, including pre-paying your funeral, investing in a funeral bond, or saving incrementally in a term deposit.

For many people, putting money in an actual savings account makes more sense than paying any insurance premium. Let’s do a basic comparison: Geoff and Linda, both 70 years old and in good health, have funeral insurance. Geoff pays $125/month, and Linda $95/month in premiums. If Geoff saved the same amount, he’d have $10,000 before he turns 77. For Linda, she’d have saved $10,000 by the time she’s 79.

The example above assumes that those monthly instalments amounts stay the same. In most funeral insurance products, your premiums increase over time. Also remember, that in the first year or two, there is no coverage – so there is immediately at least $1,500 for Geoff and $1,140 for Linda paid into nothing. To put that into context, those initial premium payments would have already paid off more than 50 per cent of their funeral with a provider like Bare.

‘But I’m already paying for it’

Thousands of Australians currently have funeral insurance. I speak to multiple people with policies daily. The consistent concern is that they feel obligated to keep paying, as they have already paid in a lot, and are waiting for their payout.

In many instances, they are throwing good money after bad. I understand the emotional attachment to the money they have paid, but funeral insurance should be calculated as the money you expect to pay in the future. Remember, every fortnight or month your premium is due, the balance is reset. You start on zero. 

However, those who currently have funeral insurance and anticipate their passing is likely in the next couple of years, keeping it may be the most prudent option. Ultimately it will come down to personal circumstances.

Before taking out a funeral insurance policy, consider these points:

  • Funeral insurance is not a savings plan. If you cancel it before passing away or reaching the Early Payout date, you won’t get anything back.
  • Depending on how long you live, you might be paying funeral insurance premiums for a long time. In most policies there is no cap on what you may pay over the term of the policy, so you may end up paying a premium for a long time.
  • It is possible to pay more in premiums than the amount of cover provided by the policy. Understand the terms and conditions of each insurance contract before deciding to buy or continue to hold a policy.
  • The long-term affordability of the policy, based not only on your current income, but the income or pension you are likely to have in the future. Are you sure you will be able to continue to pay your premiums for potentially a long time?
  • Where available, the Early Payout option may impact entitlement to the age pension and other government benefits, and may have income tax implications. The additional benefit from exercising the Early Payout option will need to be included in your assessable income. You should consider these impacts and seek financial advice if necessary, before exercising this option.
  • Many funds increase your policy coverage amount and premiums annually, so be aware if this is applicable to the policy you are considering, or your current premium.

Funeral insurance was originally sold to fill an important niche for people – to create certainty and comfort that when they pass away, there will be money available to cover the costs. There are now a range of alternatives that fill this need.

You can compare your funeral payment options for yourself with our funeral insurance calculator tool here.  

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.
 

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About Cale Donovan

Cale Donovan is the co-founder of Bare, Australia’s most affordable, and least traditional, funeral director.

Bare Cremation provides a simple, affordable, but tasteful cremation service by operating online. Bare makes arranging and pre-paying a funeral seamless and affordable, so Aussies can spend their money on living, not dying. A Bare pre-paid funeral takes just minutes to arrange online or over the phone.

Cale has held multiple executive roles at high-growth start-ups in Australia and San Francisco, building technology for underserved industries including agriculture, construction and recruitment. He’s now bringing the funeral industry into the digital age.
 

For more information or interview opportunities please contact:

Mel Buttigieg, Communications Manager | 0412 567 707 | mel@bare.com.au 

or Cale Donovan, Co-founder | 0487 408 879 | cale@bare.com.au

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