What you need to know about funeral insurance

Sending off a loved one in style can be more expensive than you realise.

Funerals can cost from $4000 for a basic cremation to around $14,000 for a more elaborate casket, burial and flowers, says consumer website moneysmart.gov.au.

Many people don't want their families to worry about financing funeral costs, so they might consider funeral insurance.

The bad news is that in trying to avoid being a burden on others, consumers settle for the first product they find, according to research by the Australian Securities and Investments Commission (ASIC).

"We recognise that planning for a funeral can be a difficult process," says ASIC Commissioner Peter Kell.

"It is important to understand what they are buying and the difference between each product, so they have peace of mind and pick the best product for their financial circumstances."

Chances are you have seen an ad for funeral insurance on TV.

A number of companies offer funeral cover, including Real Insurance, APIA, Australian Seniors Insurance Agency and Aussie.

How funeral insurance works

Most insurers guarantee cover for anyone between 18 and 79 without the need for blood or medical tests.

You can choose the amount you want to be insured for - generally between $3000 and $15,000, but some insurers may go higher.

If you die from accidental causes, though, some insurers will pay triple the benefit. So if you had $10,000 cover and died in a car accident, they'd pay out $30,000.

In the first year most insurance companies will cover you for accidental death only. So if you take out funeral insurance and six months later die from an illness, your family will not receive a payout.

As with any insurance policy, you'll need to pay a premium and you can often pay that fortnightly or monthly at no extra cost. Some insurers stop charging premiums once you reach a certain age - usually 90 - but the cover continues.

Premiums vary based on age and the level of cover. The premium for a 45-year-old female wanting $10,000 cover was $8.66 a fortnight with Real Insurance.

The quote for a 55-year-old male wanting $12,000 cover was $21.83 a fortnight. You may also opt for "family" cover, which will cover your partner and dependents.

"Premiums for funeral insurance usually increase with age," says ASIC's Kell. "If you can't keep up the payments, you are likely to lose all the money you have paid towards the insurance."

So it's important to consider whether you'll be able to continue paying the premium in the long run.

Think also about the cost-benefit if you take out insurance when you are very young or if you expect to live a long time: the risk is you will contribute more in premiums than the eventual payout.

MoneySmart suggests visiting mylongevity.com.au to work out your life expectancy. Ask how quickly the insurer can pay out and what's involved in making a claim.

Alternatives to funeral insurance

Funeral insurance is not your only option. According to moneysmart.gov.au, other possibilities for helping your family pay for your funeral include:

• Life insurance
  If you have life insurance, some of the payout can be put towards the funeral. If this is something you're considering, check with your insurer if it has an "advance payment option". See the Life insurance article in Money's August issue.
   
• Save for it
  Set up a term deposit or online savings account and save until you get to your target amount. Leave that in a separate account and tell your family about it so they can access it if they need it.
   
• Your estate
  If you have assets like super or property, they can be used to pay for your funeral. This can take time so your family may need to pay and be reimbursed once probate is granted.
   
• Prepaid funeral
  You can pay for your funeral in advance - either in full or in regular instalments. It's up to you whether you want to control all the arrangements or leave it to relatives later. The biggest plus is that costs are fixed in today's dollars.
   
• Funeral bonds
  You can purchase a funeral bond through a friendly society or life insurance company or from a funeral director. You can pay a lump sum or invest regular amounts.

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