The difference between funeral insurance and funeral bonds
Funeral insurance is advertised quite heavily, especially on day time TV, and if you are thinking about pre-planning your funeral, it may seem this is the only option available to you. The market actually has two main products to choose from – funeral insurance and funeral bonds.
So how does funeral insurance work?
Like any other insurance, you pay ongoing monthly or fortnightly premiums for a fixed amount of cover, usually from $5,000 to $15,000. This amount is paid to your beneficiary upon your death to help cover funeral costs.
However, unlike insurance on unexpected events like motor accidents, we know we will all die at some point. What we don’t know is when it will happen. You need to think about your life expectancy, and whether you can afford funeral insurance for the next 10 years or more.
When looking to take out funeral insurance, the following are points to consider:
You can live a long life and end up paying more
For easy calculation, let’s look at this example. If you pay a $100 monthly premium for a fixed $10,000 cover, in 9 years you would have paid out more than $10,000 in premiums, assuming they remain at the same price over the years.
Now assuming you live beyond these 9 years, you will be paying an additional $1,200 out of pocket each year for the rest of your life, with no interest. As you need to continue paying premiums in order for the contract to be fulfilled, you end up paying more for the insurance than the value of your cover and the actual cost of your funeral. With Australians enjoying longer life expectancies today, many senior citizens with funeral insurance are burdened by this dilemma.
Not only do you have to keep making payments, but premiums may increase with the Consumer Price Index (CPI). On a post-retirement income, they may become unaffordable over time. If you stop your payments (or even miss one), the policy may be cancelled and you lose every cent you have paid towards it. Read the PDS with care as all insurers have their own terms and conditions.
Limitations to your policy
While you are covered from day one on your policy, most insurers only cover for accidental death in the first 2 years. If you die from a sudden illness within this period, you may not be covered. Read the fine print before you sign up. If in doubt, be sure to ask.
Sometimes, it may take time for your family to receive the payout for your funeral. If the circumstances surrounding your death are not clear, it may take even longer.
An alternative choice
If your final wish is to make things easier for your family, there are other ways to ensure your funeral does not burden your loved ones. These alternatives offer more choice and financial flexibility:
A pre-paid funeral lets you choose how and where you wish to be put to rest. A contract with a funeral director ensures that your final wishes are fulfilled. You can prepay your funeral in instalments over time and lock in the cost at today’s prices. Once you have paid the amount agreed in the contract, you don’t need to pay any more.
Funeral bonds are investment products that help you save towards funeral expenses. These funds can only be withdrawn upon your death for this sole purpose. Also, money invested in funeral bonds (up to an allowable limit) is not subject to asset or income tests for your Age Pension. Read more about it on the Centrelink website.
Funeral bonds can suit people who want to pay for their funeral in advance but do not wish to think about the details. You can contribute a lump sum or pay regular monthly payments until you reach the chosen value of your bond, but bear in mind that returns may not keep up with inflation. Do read the Disclosure Document carefully as you cannot access your money unless it is to meet your funeral expenses.
Planning for your own funeral ensures you are prepared for the inevitable, and offers better peace of mind. Find out more about the options available to you today to help you make well-informed decisions.