Funeral Insurance Traps
Tips to help you the right funeral insurance provider in Australia.
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Over the last few years, funeral insurance has got a lot of media coverage and not for the right reasons. An investigation by AISC found that some insurers were offering predatory products calling for tighter regulations on these products.
With bad operators out there it helps to know what to look for in a policy and how to spot a scam. This article looks at some of the most recent issues and gives tips on how to avoid some of the funeral insurance pitfalls.
1. Policies not providing value for money
The most well-publicised problem is people 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.
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.
A study by Rice Warner conducted in September 2010 found one case where a policyholder could expect to pay $85,099 in premiums for a $6,000 funeral if the cover was taken out over a period of 30 years (The Australian, 2012). What's more, some plans will actually discount previous premium payments that have been made if the policyholder misses a single payment.
Keep in mind the average funeral costs around $7,500 in Australia, so you shouldn't be paying much more than that towards your policy.
2. Not being able to pause your policy
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.
3. Avoid 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.
4. Look into the company's reputation
It is no secret that much of an insurance companies success is built on the reputation that is built from their past clients. Applicants should take the time to read up on the company and the experience that other people have had with them in the past. Consider the companies financial strength and if there is any chance of them going bankrupt over the course of your policy.
There are many different websites and forums online that can give testimonials of how people found their service and if there was any issues over the course of their policy. It's important to take each review with a grain of salt and not let your decision be swayed by the odd negative comment. Some important points to look out for;
- The companies application process.
- Service provided during application and over life of policy.
- Ability to review policy as situation changes. Was there much flexibility working with this provider?
- Ongoing support when needed? Could they be reached at ease.
- Experience at claim time. Was the process straightforward?
How much funeral insurance do I need?
Funeral Insurance can provide great support for families at an extremely difficult time by providing a lump sum payment to cover the costs of a loved ones funeral following their passing. While the average cost of a funeral in Australia is around $7,500, funerals can anywhere from $5,000-$30,000.
What expenses need to be covered?
- Flowers
- Casket/Urn
- Burial Plot
- Grave Marker
- Service
- Hearse and Other vehicles
- Digging and filling of grave
- Driving costs
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.
Who might consider taking out funeral insurance?
Funeral Insurance can be a good option for people in their later years where life insurance may not be as viable an option. They may not have many financial obligations to take care of and are simply looking to ensure there is a financial safety net in place in the event of their death.
Funeral insurance can also be a viable option for people that have struggled in the past to be accepted for life cover due to the level of risk they carry to providers. Most funeral insurance policies do not require applicants to undertake any medical underwriting.
Conclusion: Know exactly what you are signing up for when taking out funeral cover
It is crucial that anyone taking out funeral cover takes the time to assess their own situation and the different options available from providers before signing up for a policy. It is of utmost importance to determine how much you could potentially end up paying over the life of the policy and if possible find a policy that will cap premium payments once they have reached the sum-insured.
Compare funeral insurance currently offered by Australian providers
Photo by Thomas Bormans on Unsplash
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