With so many funeral planning options available, it’s easy to be confused when trying to figure out what’s best for your needs. This article demystifies the different funeral planning options available in the market.
Basically, you have 3 main options:
- Funeral Insurance
- Pre-paid Funeral
- Funeral Bonds
1. Funeral Insurance
Funeral insurance is a type of life insurance that pays policy holders a lump sum upon death to cover funeral expenses.
While it sounds like a simple investment, it can actually be a more risky way to plan for your funeral costs. A study by ASIC revealed that 80% of all people lose all of the money they pay to their funeral insurance policy, and another study by Rice Warner found that if you took out insurance when you were 60 and passed away when you were 90, you could end up paying over $85,000 in premiums for a final payout of only $6,000.
A common trapping of funeral insurance is that while initial premiums seem small and easy to pay (around $20/fortnight), by age 80, they can easily be four times that amount. At that age, many Australians are reliant on their pension and have used up most of their savings, meaning they can no longer make the necessary payments and forfeit all the premiums paid over the life of the policy.
While there are now some funeral insurance policies with more favourable terms and features for consumers, in our view, in the majority of cases, prepaid funerals and funeral bonds offer a better way to plan financially for your funeral.
For more information, see our Guide to Funeral Insurance.
2. Pre-Paid Funerals
A pre-paid funeral is a funeral planned and paid for in advance with the funeral director of your choice. When you have discussed and planned all the details with your funeral director, you sign a written contract and pay for the funeral at today’s prices.
Can you pay for a pre-paid funeral in instalments? The answer is, “yes”. If you can’t or would prefer not to pay for the entire funeral in one go, most funeral directors will allow you to pay the amount in instalments, generally over the course of 1-3 years.
While it can be a difficult thing to think about, planning the funeral details and arranging to have everything paid for in advance will relieve your loved ones from a significant amount of emotional and financial stress. If your family doesn’t know your wishes, they are likely to struggle arranging your funeral and will be susceptible to being pressured into spending a lot more on items that you think are excessive.
What if the funeral director goes out of business? An important detail to understand is that the funeral director does not hold on to the money you pay for the pre-paid funeral. Instead, it is held by an independent entity, such as a friendly society or trustee company, who keeps the money secure until it is required to be released to the funeral director.
A final benefit of a pre-paid funeral is that it isn’t considered an asset, so it isn’t taken into account when assessing your pension payments.
For more information, see our Guide to Prepaid Funerals.
3. Funeral Bonds
A funeral bond is an investment product that helps you to save for a funeral. Funds can only be withdrawn after your death to pay for your funeral.
When you invest in a funeral bond, you either invest a lump sum up front, or commit to a monthly contribution (usually from around $42/month). Your funds are then invested until the time that they are required.
While you are able to nominate your preferred funeral director in advance, you can also let your family make this decision at the relevant time. The funds will then be transferred to the chosen funeral director
Unlike funeral insurance, an important feature of funeral bonds is that if you miss a payment or stop making contributions, the funds saved are not forfeited and are still available to be used under your name.
Like with pre-paid funerals, funeral bonds are exempt from the asset test that is used to assess pension payments (up to a maximum of $12,500).
For more information, see our Guide to Funeral Bonds.
Pre-Paid Funerals vs Funeral Bonds
Pre-paid funerals and funeral bonds are both good options to consider when it comes to funeral planning. So why would you choose one over the other? Let’s look at some of the key differences:
- If you want to think about and plan all the details of your funeral ahead of time, a pre-paid funeral might be the way to go. However, many people find this confronting, so if you’d prefer not to think about your funeral but want to make sure your family are covered financially for your death, a funeral bond might be a preferable option.
- While a pre-paid funeral will cover all the agreed upon costs of your funeral, a funeral bond might not necessarily cover all of the costs. For example, if you manage to save $8,000 in a funeral bond but the funeral ends up costing $10,000, the $2,000 shortfall will still need to be covered.
- Finally, it’s important to consider the financial difference between the two options. With a pre-paid funeral, your investment is guaranteed to keep up with inflation and increasing funeral costs. You don’t take any risk on inflation. On the other hand, with funeral bonds, depending on how they perform you can either end up earning a return that either outperforms or underperforms inflation and increasing funeral costs. It allows for both downside risk and upside gains in relation to inflation.
If you are thinking about purchasing a pre-paid funeral but you’re not sure which funeral director to choose, click on the green button below to compare funeral directors in your area. Alternatively, you can request quotes local funeral directors by filling out this short form.
For more guidance on finding a funeral director in or around a capital city, see our city specific guides:
- Choosing a funeral director Sydney
- Choosing a funeral director Melbourne
- Choosing a funeral director Brisbane
- Choosing a funeral director Adelaide
- Choosing a funeral director Perth
We hope this article has helped you understand your different funeral planning options. If you have any questions, feel free to ask us in the comments section below.
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