How funeral insurance premiums work

Funeral insurance premiums are ongoing: you usually keep paying them for as long as you live, and they go up as you get older. Over enough years the total you pay can be more than the lump sum your family receives, and if you stop paying, the cover ends and you generally lose what you have already paid.

Please note  This is general information, not financial advice, and the worked example below is an illustration with made-up round numbers, not a quote or a market price. Check any policy against its own product disclosure statement and ASIC Moneysmart’s funeral insurance page.

Age-stepped, “fixed” and capped premiums

In its 2015 review, ASIC described funeral insurance as a form of life insurance with premiums that are ongoing and often stepped, meaning they rise as you age. For life insurance, Moneysmart now calls these variable age-stepped premiums: based on your age and recalculated at each policy renewal. Moneysmart puts it in everyday terms: premiums go up after you turn 50, and every year with inflation.

A premium described as fixed may still rise. In its 2015 review, ASIC found that even so-called “fixed” premiums often increase, along with the benefit, under “inflation protection”, usually by 5% a year. The same review noted that some insurers had begun offering premiums meant to stay level for the life of the policy, and capped premiums, where you stop paying once the premiums reach the benefit amount. For life insurance generally, Moneysmart now describes the alternative to age-stepped premiums as variable premiums, which start higher but whose changes aren’t based on your age, and it says that whichever way you pay, premiums are not guaranteed and may change annually. Policies differ, so the product disclosure statement is where a policy’s own rules are set out.

A worked example

To see how the total builds, take an illustration. The benefit is $10,000, inside the $5,000 to $15,000 range Moneysmart says is usual. The premium is $30 a fortnight and, to keep the arithmetic easy to follow, it never rises. There are 26 fortnights in a year, so a year of premiums is $780.

In this illustration the premiums pass the benefit late in the thirteenth year. With a real premium that rises with age, the total from the same starting premium would pass the benefit sooner. Moneysmart’s own warning is starker: if you live another five to 10 years, you may end up paying more in premiums than the cost of the funeral.

Moneysmart’s example: Mary

Moneysmart tells the story of Mary, who took out funeral insurance at 58, while still working, for $20 a fortnight. By 71 her premium had doubled to more than $40 a fortnight, and it had gone up every year as she aged and with inflation. She found it hard to pay on a much lower retirement income, and when she added it up, the policy had already cost her more than $10,000 over 13 years.

What ASIC found when it looked

ASIC’s report Funeral insurance: A snapshot, published in October 2015, looked at data from nine insurers for 2013 and 2014. Its figures are a decade old, but they show how these policies behaved at the time:

• 4 ×For people aged 80 to 84, the average annual premium was four times as much as for people aged 50 to 54.
• 80%In 2014, the number of policies cancelled was 80% of the number sold. The main reason was cost.
• 55%Nearly 55% of cancellations happened in the policy’s first year.
• 35%Of the cancellations, 65% were started by the customer and 35% by the insurer, for non-payment of premiums.

ASIC also found that, in a small number of cases, people had already paid more in premiums than they would receive as a benefit, and that the way many policies were priced left that possibility open. It recommended that insurers give an upfront estimate of a policy’s total cost and clearly disclose when total premiums could exceed the benefit.

Questions a policy document should answer

Moneysmart’s cautions turn naturally into questions to put to any policy before signing:

• How much will the premiums add up to over 10 or 20 years, and how does that compare with the benefit?
• How do the premiums change after 50, and each year with inflation?
• Could I still afford them on a smaller retirement income, such as the Age Pension?
• What is covered in the first few years? Moneysmart says most policies cover only accidental death at first, and a death from a terminal illness in those years may not be covered.
• What happens if I stop paying? Moneysmart says you will probably lose the money you have paid.
• Is it “expenses only” cover, where my family would need receipts to claim?

Moneysmart suggests shopping around and comparing quotes before you sign, and looking first at the alternatives: a prepaid funeral, a funeral bond, super, or a high-interest savings account. Those are compared on four ways to pay ahead.

If you already hold a policy

Whether to keep, change or stop a policy depends on your own situation, and a free financial counsellor can help you work through it; the National Debt Helpline offers free financial counselling.

If you have a problem with an insurer, Moneysmart’s advice is to contact the business first, then make a formal complaint in writing. If it is still not resolved, the Australian Financial Complaints Authority (AFCA), an independent scheme that considers insurance complaints, can help, and Moneysmart says such schemes hear complaints for free.