It’s often difficult to think about your own mortality and the people you are leaving behind. However if you think about those you are leaving behind for a moment, it’s much easier to get motivated and prepare for your own passing. Will your family be able to afford the various funeral expense, will they struggle to pay the expenses your passing will incur or are they financially secure? When you do pass away your family will be under enough stress mourning their loss, so adding a financial burden is a concern that many people wish to avoid.
Many older people have decided that they don’t want to place any additional financial stress on their family so have opted for a funeral insurance product. Funeral insurance is a payment that occurs on your passing to pay for funeral related expenses such as the cost if a casket or internment, and any related ceremonies.
This article will examine the risks and benefits of obtaining a funeral insurance policy, highlighting what you should be looking for in a policy to obtain value for money and examining if funeral insurance is good value for money at all.
Funeral Insurance is actually a very old form of insurance that can be traced back to ancient Greece when guilds called “benevolent societies” cared for surviving relatives and paid a death benefit to the family. The tradition went on in the middle ages and Victorian times with “friendly societies” taking up the cause.
In modern times, funeral insurance has been a part of many life insurance policies, adding sufficient compensation to cover the cost of the funeral in the life insurance payout. In recent years, companies have started heavily promoting funeral insurance as a separate policy at a substantially reduced price compared to life insurance, and with different eligibility requirements so older people could obtain it. Funeral insurance also pays out much quicker than many life insurance policies, which need sometimes need to establish cause of death before paying.
Before you buy into a funeral insurance policy you have to consider the value for money you receive. Under some funeral insurance plans you can end up paying more in premiums than the value of the cover, so you might pay $10’000 in premiums for a $5000 funeral eventually. Based on the average life expectancy, economists have calculated that taking out funeral insurance at the age of 65, your premiums will be much higher than the value of the insurance by the time you are 91. So you should think about your family history and current health situation before jumping into a policy.
With most insurance policies, you will only pay funeral insurance until age 90, then coverage becomes free. Most Funeral insurance premiums will be more expensive the older you are, so it’s inexpensive when you are 25 but much more expensive when you are 72. Some policies have fixed premiums for the entire duration of the policy.
It really pays to read the fine print of insurance policies because they can vary a great deal in regards to other specifics. With many policies the benefit amount increases over time but some have a fixed benefit throughout the entire policy. Some policies have a restriction on accidental death in the first couple of years of the policy. Some polcies are more expensive if you are a smoker or more expensive if you are a male (because they die earlier than females).
Instead of a funeral insurance policy (or in conjunction with one), there are other ways to cover funeral expenses that should be considered:
Prepaid Funerals will pay for a part or all of the funeral costs, at todays prices. That means if it costs $5000 to bury you today, despite possibly costing more in the future, you are still covered. There are a number of ways to pay for a prepaid funeral:
- Pre-purchased funeral items: you pay for small parts of the funeral individually. Buy a tombstone first, then buy a plot and so on.
- Contributory Funds: you make small regular payments that add up over time and contribute to the cost of your funeral, this may be a partial payment
- Prepaid Funerals: You choose the specifics of your funeral and make small payments over time
Funeral Bonds are also offered by insurance companies and some friendly societies. You can make a lump sum payment or pay by installments and the money is invested, to be paid out when you pass away. It cannot be accessed for any other purpose and can only be paid to the name you specify.
Life Insurance may also be an option instead of funeral insurance, depending on your age and ability to qualify. It will be more expensive than life insurance but if it is not cost prohibitive it can be of great benefit to a family after your death.
Doing the sums
So how does funeral insurance come up against these other options? Well it will largely depend on the specifics of the policy and your personal details. Taking a run of the mill funeral insurance policy with an increasing premium and payout, if you are aged 65 when you take out a policy for $6000 of funeral insurance (numbers rough estimate):
- If you die at 66 you will have paid $500 in premiums and will be paid $6000 by insurance (roughly +$5500 difference)
- If you die at 71 you will have paid $3830 in premiums and will be paid $7600 by insurance (roughly +$3800 difference)
- If you die at 76 you will have paid $9560 in premiums and will be paid $9770 by insurance (roughly +$200 difference)
- If you die at 81 you will have paid $20,300 in premiums and will be paid $12,400 by insurance (roughly -$7840 difference)
- If you die at 86 you will have paid $40,900 in premiums and will be paid $15,900 by insurance (roughly -$25,000 difference)
So as you can see, there quickly approaches a point where funeral insurance is not providing good value for money compared to other methods for paying for your funeral. If you consider yourself somewhat healthy and have a good family history of long living it may be wise to consider other methods for covering funeral expenses.