Consumer groups have long seen funeral insurance as a problematic product that can financially exploit consumers. One funeral insurer has listened, and released a fairer policy.
Funeral insurance is often a bad option for the following reasons:
- Under some funeral insurance plans, you can end up paying more in premiums than the value of the cover.
- Prepaid funerals, funeral bonds and life insurance are more cost-effective options for covering your funeral costs.
In 2013, CHOICE joined 10 other consumer and pensioner advocacy groups, including the Consumer Action Law Centre (CALC), in calling for reforms to funeral insurance in Australia.
In response to this, Hollard Insurance has released their "Guaranteed Funeral Insurance" product, which promises that:
- premiums will never increase
- premiums will actually reduce by five per cent after every continuous five years of the policy
- the total premiums paid will never be more than the benefit paid – that is, they will pay the higher of the benefit amount or the total premiums paid since product was taken out.
"It's positive that there's now a funeral insurance product with improved terms", says Matt Levey, CHOICE Director, Campaigns & Communications. "But our advice is still that consumers look at options that can be more affordable and can give them better value for their money such as life insurance, pre-paid funerals or simply using a separate savings account."
Covering your costs
You pay for all or part of a funeral, usually at today's prices, and the services you paid for are covered when you die regardless of how much it would cost at that time. There are a few ways to fund prepaid funerals.
- Small contributory funds: You make small, regular payments for part or all of a funeral service with a particular funeral director. Conditions vary between funds.
- Pre-purchased products: You pay for a cemetery plot, wall niche or place in a memorial garden, usually directly from the cemetery or crematorium.
- Prepaid funeral plans: You choose the type of funeral you like and pay for it in full or make a deposit and pay instalments over a fixed period. Only some plans offer a refund if you cancel – always check this before committing.
These are usually offered by friendly societies or life insurance companies, and require you to make a lump sum payment or pay by instalments. The money is invested and can only be used to cover your funeral. The funeral bond can be in your name or joint names; in the case of the latter, the benefit is normally paid on the death of the first joint owner.
Funeral insurance requires you usually to make a regular contribution until age 90, after which time cover continues for free. The benefit amount is either fixed or increases over time, and you're usually only covered for accidental death for the first couple of years. An age limit of between 18 and 79 years normally applies for taking out cover – the older you are, the higher the premium.
Premiums can be fixed or increase each year, and can vary according to your gender and whether or not you smoke. If premiums are not fixed you often won't know how much they increase in subsequent years. If you stop paying your premium, you'll no longer be covered and in most cases won't receive a refund.
Premiums for funeral insurance policies vary considerably. In one example the National Information Centre on Retirement Investments calculated in November 2010, monthly premiums between providers ranged from $72 to $120 for a cover amount of $15,000 for a 65-year-old non-smoking male.
Life insurance can be taken out as a standalone policy or through your super fund. The cover amount is usually more than $100,000 and covers your dependents as well as your funeral costs.