Is funeral insurance actually worth it?
Do you have a funeral plan? This isn't a cheerful subject but as baby boomers see more family members and friends heading for hospitals and nursing homes it is worth looking at how to arrange to pay for your funeral when the time comes, rather than leaving it to family, who could have to find up to $15,000 in a hurry.
Insuranceline.com.au is selling a TAL Ltd product called "Funeral Insurance".
Often people rely on paying for a funeral out of a life insurance policy or death benefit from a super fund but these payouts can take some time to process - months in fact, due to the snail pace of the probate process. Funeral directors want prompt payment.
What's the deal?
This is an insurance policy, similar to life insurance or accident cover, where you are not saving to pay for a funeral but paying premiums to insure against the family having to face the cost of one earlier than expected.
You could be killed in an accident, be struck down with a terminal disease or, on the other hand, you could live until you are 92. The timing of your exit is usually not your choice.
There are two TAL insurance options. With the Standard option you may pay up to 200% of the benefit (the funeral cost) while with Level Advantage you pay higher premiums but they won't exceed the amount of the benefit.
The premiums are capped at these percentage levels and the benefit doesn't change. In both cases no premiums are paid once you reach 90. Premiums remain fixed and don't rise each year as with some funeral insurance plans.
In one example I tested, if the funeral was in 20 years, under the Standard option the over-65 consumer would have paid $27,252 in premiums for a $15,000 funeral.
So the timing of when this policy is taken out can have a big impact on whether or not it is a good deal; take it out too early means you are likely to pay the maximum amount. If longevity runs in your family, you might leave taking out either policy for as long as possible, although the fixed premium quoted at age 75 would be higher than at 65.
That's the way insurance works - older people pay more. To test total premiums paid, visit the Insuranceline website where in a few steps you can get a quote for your age and funeral cost with both options.
The advantages of the policy are that it pays out quickly - within 24 hours of receiving the completed claim, according to Insuranceline - and the premiums are fixed and won't increase unless you make changes to your cover.
If you have an accident, the policy will pay double your funeral benefit, except stringent conditions apply to what you were doing when the accident occurs. It also gives you assurance that you won't be leaving a big funeral bill for your family. No medical is required.
What happens if I stop paying the insurance premiums?
A double payout for accidental death is available as soon as you take out the policy, unless the claim results from participating in unlawful activity, acts of war, undertaking a dangerous occupation or dangerous pursuit, death by self injury or suicide, sickness, medical or surgical treatment, taking of drugs or alcohol.
That's a long list of exclusions that can result in non-payment of the accident benefit, particularly when you don't know what occupations are considered dangerous and what is included in "dangerous pursuits".
A claim for non-accidental death made within 12 months results in only the premiums being repaid. Once the policy has been in force for five years, a "Lifetime Protection Promise" kicks in.
This ensures some benefit is paid to beneficiaries even if you had stopped paying premiums or cancelled the policy, from 25% of the benefit for less than five years' policy life to 50% for between 10 and 14 years and 75% for more than 25 years old.
Is funeral insurance a good deal?
Frankly, it depends on when you die. If you live too long under the Standard option you can pay up to double the benefit.
Alternatively, you could save for your funeral with an interest-bearing account. The catch is that the bank may not release your money unless you appoint someone with the power of attorney to withdraw it.