Funeral Insurance: Peace of mind? You're in for a big surprise

NO DOUBT readers of THE VOICE and friends of CPSA have seen and heard advertising on television and radio spruiking the benefits of funeral insurance. There are so many, from different companies, one would sometimes think there’s a station dedicated solely to funeral insurance.

Well CPSA has always held concerns about funeral insurance but with the number of advertisements increasing lately, CPSA’s concerns have increased as well. More ads means more people are being  persuaded to purchase funeral insurance.

Over the last few months, CPSA has conducted research into funeral insurance, looking at how much premiums actually cost and how insurance actually works. The research has been published in a report called The $140,000 Funeral: The pitfalls of funeral insurance.

Insurers tells us that their premiums are cheap, from only a few dollars a week. That’s about the cost of a cup of coffee, one says. In the case of accidental death, the payout doubles or triples. There are no medicals and if you reach age 90 cover is free.

When it’s put this way, it’s not hard to imagine how insurance brings you ‘peace of mind’.

CPSA believes that this advertising is very misleading and is not transparent about the true costs involved in holding a funeral insurance policy.

Unfortunately, as we found through our research, the reality is that funeral insurance can become very expensive, with many ending up paying far more in premiums than the cost of their funeral. 

CPSA looked at four different scenarios where insurance to cover the cost of a $6,000 funeral is taken out at ages 50, 60, 65 and 70. The findings were appalling.

If the policy is taken out at age 50, it takes only 20-22 years to have paid more in premiums than the insurance benefit. At 70 it would take less than 9 years.

There is a very high likelihood of living this long, between 75 and 85 per cent, depending on when insurance is taken out and whether the person is male or female. 

In most cases, more than four in five people will live long enough to pay more in premiums than they would receive in the benefit.

If a policyholder lived to 90, when they do not have to pay premiums anymore, they would end up having paid between nearly three to nearly five and half times more premiums than the likely cost of their funeral.

When a person takes out a policy at age 70, by the time they reach 90 they would have paid between $35,000 and $48,500 in premiums for a funeral that would end up costing about $12,500.

Taking out the policy much earlier, at age 50, a person would end up paying, by age 90, between $110,000 and $142,000 for a funeral costing about $26,000.

Apart from the staggering overall costs, another issue that worries CPSA is the way premiums increase.

Every year premiums increase to factor in inflation and the policyholder’s age. So not only do premiums increase annually, the increases get larger and larger.

And they do so at a time when people tend to become more reliant on less money and on the pension as their primary source of income.       

For example, a 75-year-old who has held a policy for 10 years will be paying around $55 a fortnight in premiums. That’s approximately 8% of the full rate Age Pension.

What’s worse is that premiums will continue to increase for another 14 years.

If you choose a policy that doesn’t increase the cost of premiums, the value of your benefit will immediately begin to erode because it stays the same and doesn’t keep up with inflation.

Furthermore, if a person is unable to pay their premiums, their policy is cancelled.

Regardless of how much they have paid in premiums, no benefit is payable and all premiums paid will be ‘lost’.

There is no savings mechanism as in other products such as funeral bonds and prepaid funerals.

When the real facts and figures of funeral insurance are shown, it’s hard to imagine how any policyholder can have “peace of mind”.

All they will think about as they get older is how much they’ve paid, how much they still need to pay and how they’re going to afford it. 

CPSA has heard from people who have felt trapped in their funeral insurance policy. They know they’ve paid a lot more than they had originally expected.

They also know they will have to find more money to keep paying because if they don’t, all the money they’ve paid will be for nothing.

CPSA is urging people not to get caught by the slick advertising. Look deeper to consider whether funeral insurance is really your best option. 

Funeral bonds and prepaid funerals are both safe and secure ways of funding the costs of a funeral, where the money that is put in goes directly towards the funeral expenses.

The last thing we want to see is people ending up in financial hardship in their attempts to pay for their funeral.

Funeral Insurance Costs

The graphs on the below show the cost of funeral insurance for $6,000 cover.   

Funeral insurance costs from age 50 when premiums are paid for $6,000 cover

Premiums paid from age 50:

• Premiums will cost $109,932 to $142,405 by age 90;
• The Benefit will be $31,520 to $40,299 at age 90 on;
• A funeral will likely cost $26,162 after 3.75% p.a cost increases;
• $6,000 will be worth $18,108 by this time after inflation of 2.8%; and
• Premiums will cost more than the benefit by age 71.

Funeral insurance costs from age 70 when premiums are paid for $6,000 cover

Premiums paid from age 70:

• Premiums will cost $35,601 to $48,471 by age 90;
• The benefit will be $11,880 to $15,162 at age 90 on;
• A funeral will likely cost  $12,529 after 3.75% p.a. cost increases;
• $6,000 will be worth $10,424 by this time after inflation of 2.8%; and
• Premiums will cost more than the benefit by age 78.