What’s the Difference Between Life and Funeral Insurance?

Not sure if life insurance or funeral insurance is more suitable for your situation?

Both life insurance and funeral insurance provide a lump-sum benefit in the event of death or terminal illness but both products still offer different benefits that will impact your decision of what option to go for. The decision of which option to goes for really comes down to your own situation. This article will compare the two options to help you decide what might be more suitable for you.

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  • When do you receive the benefit? Both life and funeral insurance benefits are paid upon the death of the insurer.
  • What are the conditions of payment? You pay your premiums on the agreed terms. Discontinuance of premium payments can lead to ineligibility since these are not savings you can draw cash from at a later time.
  • What is the cost of premiums? Although you are given another premium payment option in life insurance, they are similar because life's other option is stepped premium where your premiums increase as you grow older.

Benefits and drawbacks of funeral insurance and life insurance

One question you may find yourself asking as you get older is 'should I get life insurance or funeral insurance if I'm a senior?' Well, the answer to this question will be based on a number of factors, from the state of your health and the state of your/your family's finances through to your personal preference. In order to make a more informed decision about which form of coverage is best for you and your loved ones, consider the following pros and cons:

Life Insurance
Funeral Insurance
  • Your beneficiaries will receive a lump sum payment that they can use to their benefit
  • Benefit payment is processed as soon as the claim has been approved
  • The premiums are generally more affordable compared to funeral insurance cover
  • Medical exam is usually not required, so it can be well suited to people with health issues and may struggle to get affordable life insurance or cannot get coverage at all
  • Protection for times when you are to pass away all of a sudden
  • You can ensure that you have the cost of your funeral covered, which means increased peace of mind
  • Coverage may be expensive if your current health condition is poor when applying for a policy
  • The premiums can be more expensive than premiums on term life insurance cover
  • Unless a funeral benefit has been nominated at the time application, the benefit payout may be received after the funeral, which could potentially leave your loved ones in a difficult financial position in the interim
  • You may live to a ripe old age, which means that you may end up having spent a fortune on your cover by the time you die
  • You may need to have a medical examination, which is not ideal for people with health issues, particularly seniors

With this in mind, it is important for people over 50s and senior citizens to consider whether life insurance is the most sensible option for them or whether funeral insurance may be the better option. There are a number of factors that can affect the suitability of each of these types of cover, so you need to assess your situation and that of your loved ones in order to make a more informed decision.

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Do I need funeral insurance if I have life insurance?

In Australia, most life insurance policies have a funeral component. Check with you're provider if you have cover in place, if you do then you won't need to take out additional cover. If you don't, find out how much extra it would cost to add that to your policy.

A closer look at funeral insurance

Aside from the above-mentioned similarities, funeral insurance is very different to life insurance. The basic purpose of funeral insurance is pre-payment for your funeral expenses. Aside from the funeral expenses, there is no lump sum benefit which can be used for other purposes. Therefore, funeral insurance should be strictly used to pay for everything which is related to your funeral. However, despite this limitation, there are a number of benefits you can get from funeral insurance.

  • It is easy to understand - Since it will just cover for your funeral expenses, there are no other things that you need to consider or understand.
  • It is cheap - A typical funeral insurance cover is between $5,000 and $15,000 making it one of the most affordable insurance solutions in the market.
  • It does not require a medical check-up - Since funeral insurance is paid upon your death, you don't need to worry about any pre-existing medical conditions or medical proof upon application.
  • It provides your family with cash right away - Once the insured dies, you can process your claim and receive the benefit payment to financially assist you with any expenses regarding the funeral.

If your purpose in drawing out an insurance cover is for your funeral expenses, then this is the ideal insurance product for you. However, if you are expecting a cash value that you can cash in at any time, you will just be disappointed as funeral insurance has none. The only time the payment is made is when the insured dies. Therefore, if you are looking for more, you should consider taking out a life insurance policy for you.

A closer look at life insurance

As mentioned, life insurance has a cash value. Although you might receive the benefit after the insured dies, you can also cash out the value earlier to meet an immediate need. This, however, depends on the policy you take out. This type of life insurance with cash value is called permanent life insurance. Another difference of life insurance from funeral insurance is that you get a lump sum benefit that you can use for other purposes other than the funeral.

  • Term Life Insurance. This is another type of insurance product and is more popular than the others because it cost lesser than permanent life insurance and has a more flexible cover - between 5 and 30 years depending on what you need. Furthermore, the benefits are indexed according to the Consumer Retail Index which means that your benefits keep in step with the inflation. Unlike permanent life insurance, term life insurance has no cash value but the premium cost is cheaper.

Aside from the different types of life insurance policies, life insurance has different premium payment options whereas, funeral insurance has none. Regarding life insurance premiums, you can choose between stepped and level premiums.

  • Stepped Life Insurance. Stepped life insurance premiums have cheaper initial payment but it increases every year throughout the life of your policy. This means that as you grow older, your premium payment also goes higher.
  • Level Life Insurance. It begins with a much higher initial payment but the premium remains the same throughout the policy. Thus, even if you get a 30-year cover with a level premium payment, you get to pay the same amount for 30 years unless you made some changes and adjustments in your policy.

When choosing a life insurance policy, another thing that you should look for is the renewable and convertible feature of a term life insurance policy. These features allow you to later extend your cover or change it into a permanent life insurance policy.

Why get funeral or life insurance?

The question remains in your mind just like many other Australians who question the importance of having life insurance cover. Whether you get funeral or life insurance cover, here are some of the benefits you can get from it.

  • You spare your love ones from any future financial burdens. Taking care of your future expenses including your funeral and mortgage repayments lessens the burden of your surviving loved ones that might be emotionally affected by your demise. More so, it makes them focus more on important things instead of worrying about their finances.
  • You give yourself some peace of mind. Having the financial side taken care of also lessens your worry about the future. Everybody agrees that one of the reasons why people worry is the fear of lack in the future. With insurance, you know that any extra expenses that might arise in the future are covered.
  • You help your family adjust faster. The death of a loved one will always leave a huge emotional vacuum in somebody's life. Aside from the emotional side, it can also affect the family's finances, especially if the person is the breadwinner. When you have insurance to cover you - whether it is funeral or life insurance, your loved ones can get over your loss much faster because they will be able to grieve properly without worrying about paying whatever debts or financial obligations you might leave behind.

There are other benefits you can get from having insurance for you. Just remember that before you sign your name on the dotted line, read the fine print carefully so that there will be no unpleasant surprises or false expectations when you make a claim because of some misunderstanding.

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Richard Laycock

Richard is the senior insurance writer at finder.com.au and is on a mission to make insurance easier to understand.

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