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Funeral Insurance Traps

Funeral insurance is in the spotlight again.

Funeral insurance is in the spotlight yet again following recent media coverage of people who have been financially disadvantaged due to inadequate policies.

This type of insurance has come under increasing scrutiny in recent years due to the way it is being sold by insurers and the fact that consumers are not informing themselves fully about the product they are purchasing.

The problem is so endemic that ASIC plans to investigate it as part of its ongoing Royal Commission into the banks. There are several traps that consumers need to be aware of.

Consumers aren’t looking for guarantees

The first and most well publicised of these is the problem of paying more in premiums than the funeral would actually cost. This can occur when someone takes out a policy that does not offer capped premiums or a guaranteed payout.

These are known as value-guarantee features and you should always look for one or the other when applying for funeral insurance to ensure you never pay more than you need to.

A premium cap means that once the total premiums paid equals the original sum insured, you no longer need to pay premiums. And a guaranteed payout means a claim will always pay out either the total premiums paid or the original sum insured, whichever is greater.

Policyholders may not be able to pause premiums

Another problem with funeral insurance is that it does not normally include a policy suspension option like other forms of insurance. This means that if you fall behind in your payments, the insurer can cancel your policy after just 28 days and all the money you have paid to date will be lost.

There are some insurers who do offer a policy suspension option of up to three months, but most will only pay out for accidental death during this time. So ideally, consumers should look for a policy that offers an unconditional grace period or some form of budget planning assistance if you are having trouble paying your premiums.

Policyholders are choosing stepped premiums

A third problem that has come to light regarding funeral insurance is the number of consumers who are opting for stepped rather than levelled premiums.

Stepped premiums increase in cost each year as you grow older, which means they can become unaffordable later in life, particularly if your income is decreasing. Levelled premiums never go up over the life of the policy, apart from small annual rises to keep pace with inflation.

To ensure that your funeral insurance does not become unaffordable, you should make sure the premiums are levelled instead of stepped, and to make it even more affordable, the policy should also ideally contain an incentive of some kind such as a premium discount after a certain number of years.

Some key tips to follow

A report by ASIC in 2015 found that the majority of Australians cancelled their funeral insurance policies in the first few years of taking them out, so if you are planning to get funeral insurance in the near future, you would be well advised to do the following:

  • Read the PDS thoroughly before purchasing.
  • Make sure the policy contains the options mentioned here.
  • If you are unsure about the quality of cover or your ability to pay, perhaps look at more affordable ways to pay for your funeral such as a high-interest savings account, funeral bonds or a pre-paid funeral plan.

Photo by Thomas Bormans on Unsplash

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