Funeral Insurance – how does it stack up?
Funeral insurance and other prepaid funeral plans are regularly spruiked on TV. Ensuring your family does not suffer a financial burden in the case of your death is of course a good idea, but the National Information Centre on Retirement Investments (NICRI) warns consumers to be very careful before signing up to any of these products. You may find:
– 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.
– According to actuaries Rice Warner, taking out funeral insurance at age 65 could mean your premiums almost add up to the costs of four funerals if you live until 91.
Covering your costs
There are a number of different ways to cover funeral expenses:
Prepaid funerals 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.
Funeral insurance You usually pay 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 NICRI 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.
Case study – Funeral insurance costs
Peter, aged 65, takes out funeral insurance. At age 76 the premium he has paid is similar to the amount of cover he receives but from then on premiums soon add up to substantially more than the funeral benefit. By comparison, if Peter pays a lump sum today of $6000 for a prepaid funeral, he can lock in the cost of his funeral at today’s prices regardless of the time of his death.