Nothing can be said to be certain, Benjamin Franklin famously quipped, except death and taxes. And while there are limits to minimising taxes, is funeral insurance cover a cost-effective way of insuring against that other certainty of life?
By Nicholas Ta, UniSuper Private Client Adviser
What is funeral insurance?
Funeral insurance provides a lump-sum payment to cover funeral expenses, such as director fees, caskets, cemetery plots or cremations, and other associated costs.
Like many insurance policies, premiums generally increase with age (and health status) when taking out the policy.
Premiums can be offered as ‘stepped’ premiums (more common with funeral insurance), where prices increase with age, but are less expensive earlier in life; or as ‘level’ cover, where premiums remain the same (subject to inflation), but are generally more expensive earlier in life.
Value for money?
Funeral cover has recently been subject to a range of controversies, including a 2015 ASIC report, which highlighted the rate of premium increases and high cancellation rates as cause for concern (at the time, nearly 55% of policy holders cancelled within the first 12 months of cover with the most common reason being due to cost considerations).
The ASIC report recommended a suite of measures, including for funeral insurers to provide to consumers an upfront estimate of the total cost of policies based on the options offered, and to disclose that premiums could exceed the benefit amount payable.
In 2013, the Consumer Action Law Centre, joined by other consumer and pensioner advocacy groups, called to reform funeral insurance, in light of a perceived lack of transparency around premiums and benefits.
These perceived pitfalls—increasing costs of premiums, and total premiums paid exceeding benefits payable—mean that for many, other alternatives may be a more cost-effective option.
Pre-paid funeral arrangements, such as funeral plans or cemetery plots, contributory funds (regular payment plans to funeral directors), or even regular saving in bank accounts, can be a more cost-effective way of covering funeral expenses.
Another option are funeral bonds, where a deposit is paid to an insurance company or friendly society to invest the funds (for a fee) to cover funeral expenses.
Pre-paid funeral expenses and some types of funeral bonds are also generally exempt from Centrelink Age Pension assets or income tests up to a particular limit.
Another option is for beneficiaries to consider arrangements to cover funeral expenses themselves, with these costs often being reimbursed from the proceeds of the estate or life insurance policy (where applicable).
In the event of a terminal medical condition or death, super balances and any life insurance benefits held within super can be accessed as a lump sum—however, these events need to be assessed against applicable trust deed provisions, super regulation and/or insurance policies, with varying processing times depending on the nature and complexity of the claim.
For super death benefits, it’s a good idea to consider binding death beneficiary nominations, so that payments may be expedited, and paid in line with the late member’s wishes.
Sometimes overlooked, estate planning is an important financial planning consideration, especially where asset transfers, tax implications, or diverse family structures exist.
Members have exclusive access to UniSuper Advice to develop estate planning strategies. We can also refer you to an estate planning specialist firm if you need bespoke legal advice.
Contact UniSuper Advice to find out more.