Paul Clitheroe
Paul Clitheroe

Funeral insurance can be full of traps

YOU'VE probably seen the ads for funeral insurance on TV - they pop up a lot, but they're thin on details, and when it comes to funeral cover it's critical to read the fine print.

The idea behind funeral insurance is very straightforward. You pay premiums, and if you die, the policy will pay for the cost of your funeral.

The thing is, if you stop paying, you lose your cover - and with some policies the premiums can really start to jump as you get older. Not surprising really.

I can certainly understand that many seniors are tempted by this sort of product because they don't want to be a financial drain on their families. In this sense, funeral insurance can seem like a good idea. According to the government's MoneySmart website (www.moneysmart.gov.au) a funeral can cost anywhere from around $4,000 to $14,000 - an expense many families could struggle to meet.

However part of the problem with funeral insurance is that some insurance companies can be very pushy when it comes to selling cover.

A colleague of mine has experienced this first-hand. One particular insurer has repeatedly contacted her husband aiming to sell funeral cover. Despite explaining that her husband is aged 42 and comes from a family lucky enough to live well into their nineties, the insurer doesn't want to take 'no' for an answer.

Yet if you start paying funeral insurance from a relatively young age, you could end up paying considerably more in premiums than the cost of a funeral.

A report on funeral insurance by consumer group Choice, noted that taking out funeral cover at age 65, could see you pay premiums equal to the cost of about four funerals by age 90. That certainly doesn't represent value for money.

That's why it's worth considering alternatives to funeral insurance.

If you have life insurance, which many workers have through their super fund, the lump sum payout made on your death can be used to cover a funeral. So you probably don't need separate funeral insurance.

Retirees, who are drawing down their super, may not have life cover in place. If you're really concerned about meeting funeral costs, a simple option is to open a dedicated savings account to save for a funeral.

Or you could consider a funeral bond. This is a type of savings product usually offered by friendly societies or life insurance companies. The funds can only be withdrawn after your death to pay for your funeral.

It's also worth noting that you may be entitled to funeral payments from the Department of Veterans' Affairs, your trade union, or your state or territory government. A bereavement payment could be also available through the Department of Human Services.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.


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