Birthdays, cake and funerals. Funeral Insurance versus Funeral Bonds.
A friend of mine turned 60 recently and according to the government life tables she may have another 26 birthdays left. That’s decades away. No need to think about dying yet, right? I think it's time for some more cake.
But judging by the number of TV ads about Funeral Cover many of us do think about dying or at least lifting the burden of funeral expenses from our family. It’s an emotional decision that is well meaning but can have big financial implications so we thought we’d compare two common funeral plan options, Funeral Insurance and Funeral Bonds.
Like most insurance policies you pay a monthly premium in return for an Insured funeral benefit. Premiums are either fixed or increase with age. There are generally no medical and health checks but only accidental death is covered in the first 12 to 24 months. On death, the money is paid to nominated beneficiaries or the estate that then will pay for the funeral. With some insurers you can end up paying more in premiums than the cover you receive. If you stop, or miss premiums, the cover will stop, generally with no reimbursement.
Funeral Bonds are a tax paid investment product, usually capital guaranteed, with no personal tax payable and pay a tax bonus when the funeral benefit is paid. You can make a lump sum or regular payments and if you stop contributing you will always get back the balance of your investment plus the tax bonus when a claim is made. There can be age pension benefits too as up to $12,250 of contributions in a Funeral Bond are exempt from Centrelink’s asset and income test. On death, your loved ones can elect to pay the Funeral Director or the Estate.
Let’s compare $10,000 of funeral cover for my friend. Enough to cover a modest funeral I would think?
Funeral Insurance Company A has a fixed premium of $59.27 per month. If she lives to 86 she would pay around $18,492 in premiums. If she lives to 90, premiums stop ($21,337 in paid premiums) and the funeral benefit of $10,000 is automatically paid out. If she dies before age 74 then her premiums would be less than the $10,000 funeral benefit paid.
Let’s get another quote.
Company B’s fixed premium is $47.95 per month. Premiums will stop at age 85 and they will receive a Funeral Benefit of the Insured amount ($10,000) or the total premiums paid. At age 86 that’s about a $14,385 payout at death.
The rub is a $10,000 funeral today may cost $21,500 when she turns 86 in 2042 (using a 3.0% pa inflation rate as a guide) so the family may have to make up the difference. Company A and B allow her to index the sum insured each year but premiums will also increase each year if that option is selected.
If my friend put money in a Funeral Bond with Company C and deposited $100 up front and $47.95 per month, earning 2.5% pa, she would have around $24,095 in 26 years time, enough to cover the funeral and pay for some drinks at the wake.
When it comes to Funeral Insurance it seems that customers are voting with their feet with about 55% of policies taken out cancelled during the first year1.
When looking at cover it is always important to read the Product Disclosure Statement and contact a trusted Financial Adviser.
There is more information and other options to explore on the governments money smart website.
Enough about death and dying for now let’s have some more cake.
Written by Andrew Meinel, General Manager Financial Services at KeyInvest.
Reproduced with the permission of KeyInvest, 1300 658 904 firstname.lastname@example.org
KeyInvest is a provider of Funeral Bonds. The KeyInvest Funeral Bond is issued by KeyInvest Ltd ABN 74 087 649 474 AFSL No 240667. The information is general in nature and has been prepared without taking into account the investment objectives, financial situation or needs of a particular investor. This information has been compiled from sources considered to be reliable but is not guaranteed. Any potential investor should consider the latest Disclosure Statement (“DS”) in deciding whether to acquire, or to continue to hold, an investment in the KeyInvest Funeral Bond.
1 Funeral Insurance: A snapshot, Australian Securities and Investments Commission October 2015