Let’s start with the basics.

What is funeral insurance?

Funeral insurance is a policy under which you agree to pay monthly or fortnightly premiums for a fixed amount of cover. Most policies let you choose a cover amount between $4,000 to $15,000.

How much does funeral insurance cost?

The amount of your monthly premium depends on a number of factors, including your age, whether you’re a smoker, male or female.

To give you an idea of cost, if you take out your policy at 52, your starting premium will be around $45/month, whereas if you take out your policy at 72, your starting premium will be around $140/month.

Should you get funeral insurance?

The answer is absolutely not. It’s ultimately a scam. If you want to plan for your funeral, there are much better ways to do so, such as purchasing a prepaid funeral or investing in a funeral bond.

So why would anyone get funeral insurance?

The main attraction of funeral insurance is that it can be paid for in smaller instalments, which makes people think that they are an affordable option. However, what most people don’t realise is that the instalments often get more expensive the older you get, and what starts out as an affordable option, soon becomes too expensive to maintain. Premiums on average are 4 times higher for 80-84 year olds than they are for 50-54 year olds.

A shocking statistic uncovered by an ASIC investigation into funeral insurance was that 80% of all insurance policies are cancelled. When a policy is cancelled, or a payment is missed, all of the premiums you have paid up until that point are forfeited.

Let’s look at an example:

Imagine Betty takes out a funeral insurance policy at 57, initially costing her a small sum of $40/month. 15 years later, at the age of 72, after having contributed $12,000 to her policy, her premiums have now doubled to $80/month and she can no longer afford the instalments on her pension and dwindling savings.

Her policy is cancelled and she forfeits all the money she contributed over 15 years. She is not refunded anything.

I’ll repeat the statistic again. This scenario happens to 80% of people who take out a funeral insurance policy.

When do you “win” under a funeral insurance policy?

The only time you will achieve a better outcome under a funeral insurance policy vs alternative funeral planning options is if you pass away before the premiums you have paid exceed the covered amount – generally within 6-7 years. However, you still need to read the fine print because if you pass away too early, you may not be covered. For example, if you pass away within 2 years of the policy, usually your funeral will only be covered if the death was accidental.

What are the risks of funeral insurance?

There are many:

  • Stepped premiums describe premiums that get bigger the older you get. Premiums are also increased over time to account for inflation. As described above, stepped premiums can have the effect of making people think that funeral insurance is initially cheap, but eventually trap them into an unaffordable product later in life when they are reliant on their pension and have dwindling savings.
  • If you don’t die in the next 6-7 years (knock on wood), you will probably end up paying much more on your premiums than the cover amount you’ll finally receive when you do pass away. It’s not uncommon for people to pay 4 times as much in premiums as the amount of their payout. According to a study conducted by Rice Warner, under certain funeral insurance policies you could end up paying $85,099 in premiums for a $6,000 funeral if you took out the policy at age 60 and did not die until you were 90.
  • If you can’t keep up with your payments, your policy will be cancelled and you will forfeit everything you have paid to date. Spare a thought for Betty in our example above.

OK, but what if you really, really want funeral insurance?

As we’ve discussed, there’s a lot of risk associated with funeral insurance, and almost no upside. But if for some reason, you really want funeral insurance, there are a few features you should look out for:

  • Capped premiums – If your policy has capped premiums, your premium contributions are capped at the cover amount (or at a figure slightly above the cover amount), which means that you won’t end up paying substantially more than the benefit you eventually receive.
  • Age capped premiums – If your policy has age capped premiums, your contributions are only payable up to a certain age (for example, 90 years old).
  • Fixed premiums – Some policies don’t have stepped premiums, but instead are fixed for the life of the policy.
  • Matched premium payout – Some policies will payout the total amount of premiums paid where this exceeds the amount of the cover. For example, you might have cover for $10,000 but might end up paying $20,000 over 30 years. When you pass, you will be paid out the full $20,000.

What are the alternatives to funeral insurance?

The two main alternatives to funeral insurance are prepaid funerals and funeral bonds. For more information on prepaid funerals, see our Guide to Prepaid Funeral Plans.

The bottom line

The bottom line is that funeral insurance is a risk product. In order to work, the insurer has to take in more money than it pays out. In other words, there need to be more losers than winners.

The problem is that people are gambling against sophisticated insurance companies without knowing the facts or even knowing that they’re gambling on their future. It’s a game that’s rigged in favour of the house – and for the great majority of policy holders, they end up getting trapped and losing everything.

See the full picture and make fully informed decisions. Move forward in the certainty that your loved one’s memory will be looked after. Funeral Homes are Gathered Here.

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