Funeral insurance is sold as peace of mind your nearest and dearest won’t have to pick up the tab for your final farewell. Ads claim acceptance is “guaranteed”. You can sign up on the spot, no medical checks required.
But the ease of signing on belies the financial pitfalls of funeral insurance policies. You can ultimately end up paying thousands more than the insurance cover is worth. If you cancel because premiums are too high, your money’s gone and you’ll be back to square one.
Pulling the purse strings
Funeral insurance marketing plays on people’s fears about being a burden on their family. But ads seldom disclose the lifetime costs of this product.
Based on quotes for $10,000 funeral cover for a 64-year-old, we calculated you could pay anything from 10 to 100 percent more than the policy was worth by age 84 (see our Funeral cover table). If you live out your allotted years — average life expectancy is 86 for a man and 88 for a woman — you’ll pay even more with most of the 10 policies we reviewed.
Premiums for Cigna’s funeral policy — regularly advertised on TV — start at $66 a month for a 64-year-old man. By age 84, these premiums add up to $17,500, in return for just $10,000 of cover. A 64-year-old woman would pay $14,500 over the same period.
Cigna’s policy, along with four others, requires premiums to be paid until you die. The longer you live, the more you stand to pay.
Some companies cap premium payments at a specified age. But you could still pay over the odds.
With Fidelity Life’s Golden Life policy, promoted as a life insurance policy that can be used for funeral expenses, premiums stop at 85. By that age, a 64-year-old man who takes out a policy today, will have paid more than $20,000 for $10,000 worth of cover; a woman will pay over $17,000.
Of the 10 policies, only Greenwich Life stops premiums when the amount paid equals the sum insured. Greenwich Life is a brand of DPL Insurance, which also markets the Dorchester Life funeral policy. However, the latter requires premiums to be paid until the policy holder turns 100.
Insurers point out they bear the risk if the customer dies within a short time of taking out a policy. But you can’t die too soon. All policies we looked at exclude cover for death from natural causes in the first two years — the payout will typically be limited to a return of your premiums. You only get full cover during this time if death results from accidental injury.
Across the Tasman, marketing of funeral insurance has been under increasing scrutiny. A 2015 report by the Australian Securities and Investments Commission (ASIC) found a high rate of cancellations, an issue it linked to the cost of cover and the way policies were designed and sold. Most cancellations occurred outside the cooling-off period, which meant the consumer didn’t get any money back.
The commission reported 65 percent of cancellations were initiated by the consumer with the remainder by the insurer for non-payment of premiums. In 2014, 16.5 percent (72,000) of existing policies were cancelled. However, the cancellation rate as a proportion of new policies issued for the year was estimated to be as high as 80 percent.
Pressure from consumer groups and regulators has led some companies in Australia to introduce caps on premiums so customers don’t pay more than the policy will pay out. No insurers we spoke to here are planning similar changes to their policies.
- Funeral insurance can be a pricey way to pay for your final send-off. It’s easy to end up paying more in premiums than the policy is worth. If you can't afford to keep up payments or want to cancel, there’s no refund.
- We think marketing of these policies risks misleading consumers about the cover they’re getting. The lifetime costs of funeral insurance should be clearly disclosed so consumers can make informed choices about where they put their money.