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R.I.P. off! Why you don’t need funeral insurance

This factsheet is for information only. It is recommended that you get legal advice about your situation.

Case study

In 2006 Pamela took out a funeral insurance policy. She told the telephone salesman that she could afford premiums of $30 per fortnight. She was told that if she took a “stepped premium” the premiums would increase only by “little amounts” each year. She initially took out a policy for $7000 cover at premiums of $30.63 per fortnight.
By 2013 the premiums had risen to $62.97 per fortnight (a 100% increase), but her cover is only $8500 (a 20% increase).
Throughout this period Pamela’s only source of income was the aged pension. Her situation now is that after paying for her nursing home accommodation and funeral insurance, Pamela has $10 per week to live on. The premiums are expected to rise again next year and the policy will soon require more to be paid in premiums than she has each month after nursing home care. When that happens Pamela will be forced to cancel her insurance policy and all of her payments will be lost.

What is funeral insurance?

Funeral Insurance is a type of insurance that you take out to cover the cost of your funeral after you die. Sometimes it is called a “Funeral Plan” or “Funeral Plan Insurance”. Depending on the type of funeral you would like to have, you can usually choose from $5,000 to $15,000 to cover the cost of a funeral. After you die this money will be paid to whichever friend or family member you have nominated as the beneficiary.

Planning for how you are going to pay for your funeral is a good idea, and will save your family money and stress when the time comes. However, funeral insurance may not be your best option. Like life insurance, you usually need to keep paying the premiums to keep your insurance cover, so you need to think about whether you can afford funeral insurance over the next 10, 20 or more years. It is common that people with funeral insurance pay more in premiums that the insurance company pays out when they die. Under some policies, as you get older the cost of funeral insurance will increase. Also, it is important to understand that, generally speaking, if you cancel the funeral insurance your premiums are not refunded to you. You would be better off putting your money in the bank!

Things to consider

  • Before you buy funeral insurance, check whether it is worth the money.
  • Will you be paying more for the insurance than the funeral will actually cost?
  • Consider that, as you age, it is likely that your income will decline and your expenses will increase (for things such as home help and medical costs) and you may not be able to afford to keep paying the premiums. A good question to ask is “will I get my premiums back if I cancel the contract in five year’s time?”
  • Will your premiums increase and will you be able to keep paying them? A good question to ask is “what will my premiums be in 5 years?” Think long-term and remember if you can’t keep up the payments you are likely to lose all the money you have paid towards the insurance.
  • To estimate how long you will live, visit the My Longevity website.
  • Funeral Insurance policies usually have a 12 month accident-only period. That means that a benefit will not be paid upon your death unless your death is caused by an accident. Remember, this will generally also apply if you change from one policy to another.
  • Sometimes it can take a while for your family to receive the insurance payout to cover funeral costs.

Main Problems associated with Funeral Insurance

  • You can end up paying more in insurance premiums than the benefit paid upon your death.
  • IF YOU CANCEL the funeral insurance policy you will usually NOT GET YOUR MONEY BACK.
  • Many funeral plans are “stepped” policies and the premiums for funeral insurance WILL INCREASE as you get older.
  • Unless you die in the next 5-10 years you will end up paying more than the cost of the funeral you will receive.
  • If you end up living on the Pension, you will probably not be able to afford the rising cost of this insurance product, and if you miss your payments your policy will be cancelled and you will lose all of the money you have paid so far.

Increasing premiums

Not only will you need to keep making payments over the years, but premiums often increase with age and grow over time.

If the premium payments become unaffordable for you and you stop paying them, your policy is likely to be cancelled. You will not get back the money that you have paid towards your policy. Different insurers have different rules, so read the Product Disclosure Statement carefully before you sign up.

Funeral Insurance can be misleading for consumers

Marketing: There is almost saturation marketing of funeral insurance on daytime television. These advertisements target the elderly and the vulnerable with marketing slogans such as “Don’t leave your family with financial stress”.

Point of Sale: In the cases we’ve seen, vulnerable consumers are being misled about the costs of the premiums. In particular, when they enter these contracts over the phone, consumers aren’t being told that the premiums will rise or are not being told the extent by which they will rise. Many of our clients have told us if they had known before they took out the insurance that their premiums would have almost doubled in five years, they never would have taken the insurance out.

False Assumptions: Many callers to the Insurance Law Service believe that the insurance company keeps the premiums they pay in an account, perhaps like an endowment policy. It is important to understand that funeral insurance does not work that way. Think of paying funeral insurance premiums in the same way as, say, car insurance where you pay by the month. Generally, you do not get the premiums back if you cancel the contract.

Paying for more than you get: One of the risks with funeral insurance is that you may pay more in premiums than the benefit amount, for example:

  • Most funeral insurance policies require you to keep paying premiums until you die, even if you have already paid the insurer the amount of the benefit.
  • Some policies have a term that you cannot pay more in premiums than twice the benefit amount.
  • Some policies require you to pay higher premiums so that you can stop paying once the benefit amount is reached.
  • Some policies advertise that “the benefit will never be less than the total premiums you’ve paid for each life insured”. This sounds like the policy allows you to stop paying once you’ve paid the benefit amount. In fact, you are usually required to keep paying but the amount paid over the benefit amount will be paid to your beneficiary upon your death. BUT… if you cancel the policy before your death then nothing will be paid.

Once signed up: Many consumers are reluctant to withdraw from a contract once they’ve signed up and some are even willing to go through significant hardship rather than fail to honour a contract they’ve entered.

When can you cancel a funeral insurance policy?

Under the law you are provided with a ‘cooling-off’ period, normally around  30 days after you purchase a policy. You can cancel your policy in this period and get a full refund provided that you have not made a claim. Some insurers may charge an administration fee for the cancellation.

You can cancel your funeral insurance policy at any time after the cooling off period by contacting your insurer.

Getting premiums back

If you think you have been misled by an insurance company when you signed-up for funeral insurance, there are some steps you can take.

  1. Request any recordings of the phone conversation where you were told about your funeral insurance policy.
  2. Once you have listened to the tapes, if the company misled you about the policy, call the Insurance Law Service. Our number is 1300 663 464. We are a free service.
  3. You can raise a dispute with the insurer. If it is not resolved you can lodge a dispute with the Australian Financial Complaints Authority (AFCA): read our Insurance dispute resolution fact sheet for further details.

Alternatives to funeral insurance:

  • Pre-paid funerals: can be a good option, particularly if no chance you’ll move interstate before you die and the company is reputable. Read the fine print. Many companies will let you pay by instalments.
  • High-interest savings account: Opening a joint-bank account in your name, and the name of a family member can be a really simple and effective way to pay for your funeral for three reasons:
    • First, you can put in a small payment every fortnight, depending on what is affordable to you at any one time
    • Second, your family member can access those funds as soon as they are needed for your funeral, unlike insurance payments that can take time to be released
    • Third, there is no risk that your payments will be lost if you miss a few payments, or even completely stop making payments. Your money is safe, and will continue to accrue interest.
  • Funeral bonds: an investment product that accrues interest.
  • Super: If you have super, when you die your super fund will pay out your super balance and any associated life insurance to your family. This money can be used to pay for a funeral, but it could take a long time for it to be paid out. However, if your family pays your funeral it can then be reimbursed once probate is granted. Talk to your super fund to see what approach it takes.
    • Getting Super released early: In some circumstances (like if you have a terminal illness) you may be able to get hold of your super early to cover funeral expenses. You may also be able to get your super early to pay funeral expenses of a dependent. Go to the Department of Human Services webpage on early release of superannuation or see getting super early for more details.
  • If you are a Veteran: You may be entitled to funeral payments from the Department of Veterans’ Affairs (DVA), your trade union, or your state or territory government. See the publication DVA: What to do when someone dies 13 32 54 (1800 555 254 for regional callers).
  • If your family is on Centrelink: A bereavement payment may be available through the Department of Human Services. See their webpage on what to do following a death or call 13 23 00 (1800 810 586 for TTY service).

In Summary: Take Care! Unless you die within 5 – 10 years of taking out the policy this is unlikely to be the best product for you. If you are on the pension or your expenses increase, there is a very high probability that you will have to cancel the policy before you die because you’ll be unable to afford the premiums. If you are on a higher income and can afford the premiums there’s almost certainly a better product out there.

If you already have funeral insurance

Our Insurance Law Service can talk to you about getting your premiums back on 1300 663 464. We are a free service. You can lodge a dispute with the Australian Financial Complaints Authority (AFCA).

Need more assistance? Read our Getting-help fact sheet.

Last updated: October 2018.