Which is better – pre-paid funerals or funeral insurance?

Are you wondering whether to organise a pre-paid funeral or take up funeral insurance?

We know that it can be a very confusing decision to make. And funerals can be very expensive.

The average Australian funeral costs $7,075.* For a cremation, you’ll spend around $6,000 to $10,000, whereas for burials, you’re looking at approximately $9,000 to $25,000. Read more about the cost of a funeral here.

While some of these figures are quite substantial when thinking about paying them upfront, you can actually find yourself worse off if you make fortnightly or monthly payments to funeral insurance over a long period of time for various reasons.

We usually tell our clients that it’s better to opt for a pre-paid funeral (where you can choose to pay everything upfront or via a payment plan) so that you’re completely covered. Otherwise, you may find yourself paying more than what a funeral is worth over time or potentially lose all of your money invested in funeral insurance if something happens and you’re unable to continue paying your premiums.

However, to give you the full picture, let’s look at the pros and cons for both pre-paid funerals and funeral insurance.

What is a pre-paid funeral?

A pre-paid funeral refers to the process of planning and purchasing your funeral in advance. The pricing can vary according to your funeral preferences, so we recommend that you compare prepaid plans among different providers.

Pros

  • Complete control over the details – It’s a great option for choosing exactly what you want at your own or partner’s funeral, including the type of casket, flowers, music, funeral director, clergy/celebrant, etc.
  • Remove emotional uncertainty – By organising a pre-paid burial or cremation in advance, you’ll be making funeral arrangements much easier for your loved ones as everything will be already mapped out for them.
  • Ensure protection from escalating costs – You can pay for your funeral based on today’s prices, so you don’t need to worry about any inflation if you live for another 20, 30, or 40 (or more) years!
  • Secure your funds – Once everything has been paid for, you don’t need to think about it again.
  • No health checks required – Everyone is accepted, regardless of any ongoing illness.
  • Choose to pay an upfront sum or pay instalments – You have the flexibility to pay for the funeral in a way that best suits your budget.
  • Maximise your pension entitlement – Pre-paid funeral payments aren’t subject to the income and assets test.
  • Invested with a third party for flexibility and security – If you end up moving interstate, it is easy to transfer your pre-paid funeral to another funeral director in that state. If your current funeral director goes out of business, the funds will still apply to the new company.

Cons

  • It’s a legally binding contract – Once you have planned and paid for your funeral, you might be unable to get your money back if you change your mind at a later date.
  • You have to find the money upfront – There usually isn’t a discount for couples or families, so if you’re planning to pay upfront for the funerals for both your partner and yourself, it can become a large initial cost.

What is funeral insurance?

Funeral insurance is a policy that allows you to make fortnightly or monthly ongoing premium payments towards your funeral expenses, which is then paid to your loved ones when you pass away. The policy can provide your cover between $5,000 to $30,000 (with increments of $1,000).

Pros

  • Benefit is paid regardless of how long you’ve held your policy – So you have the security of knowing your family will receive the payment after you pass away – whether it’s in one month or 20 years’ time.
  • Different premium structures available – To help with budgeting, some policies offer different payment options including fixed or age-based.
  • Allows flexible use of the funds – Since funds are paid to one or more beneficiaries, the money can be used for any form of funeral or death-related expense necessary at the time. For example, it may go towards costs directly associated with the funeral or towards administering final affairs, such as paying any outstanding credit card debts.

Cons

  • Waiting periods may apply – You may not be covered for the first 12 months if you pass away due to natural causes. It’s best to double check these details with your provider.
  • Premiums may increase over time – As you get older, your policy may have a repayment increase, unless you choose a policy that has a fixed premium. However, fixed premium policies generally start at a higher price.
  • Risk of paying more than the actual value of a funeral – While most of us don’t know how long our lifespan is, if you set up your funeral insurance and then live for another 20 or 30 years, you may find that your funeral cover is paid off in half the time. However, as outlined in the point below, if you ever stop your repayments you will find yourself without any insurance.
  • Become uninsured if your financial circumstances change – If, for some reason, you can no longer make your payments, you will become uninsured and lose all of the money you have already paid into the insurance scheme. This means your family won’t receive a benefit when you die.

Unfortunately, we’ve had clients who have found themselves in the position of the last point. For one woman, her brother had been paying funeral insurance for several years, but let it lapse a year or two before he died. As a result, the family received nothing from the funeral insurance.

It’s one of the reasons why we believe it is a much more secure investment to go with a pre-paid funeral. If paying for everything upfront is out of your budget, then you can arrange a payment plan with your funeral director. Either way, your finances will be a lot more secure as nobody knows what the future holds.

If you have any other questions about pre-paid funerals and funeral insurances, we’d be happy to have a conversation with you. Contact us today.

Ian J Arthur Funerals (Funeral Directors In Hills and Sydney)

* 2017 study by finder.com.au
* Funeral plans on finder.com.au