Despite changes funeral insurance still a rip off
ON 1 October 2019 the Australian Government released draft regulations and legislation to take action on one of the recommendations from the Banking Royal Commission.
The Banking Royal Commission heard horror stories from customers who had spent thousands on funeral expenses policies that were found to be too expensive and often did not cover a funeral service in its entirety.
There are two types of funeral insurance: funeral life insurance policies and funeral expenses policies. Both are bad ideas and should be avoided.
A person buying a funeral life insurance policy nominates a benefit amount (usually between $5,000 and $20,000) that is paid upon a person’s death. Commercials on daytime TV for funeral insurance are for funeral life insurance policies.
A funeral expenses policy will pay for funeral costs up to a nominated limit. The actual cost of a funeral may be less than the limit of cover that the funeral expenses policy offered. These policies are not advertised as much and are often sold by funeral directors.
The Banking Royal Commission found that there is a large potential for consumers to pay more in premiums over the life of a funeral expenses policy than they will receive in benefits when they die.
The Royal Commission did not comment on the fact that funeral life insurance policies can be and usually are just as bad in that respect.
A legal loophole means that funeral expenses policies are currently not a financial product. They are therefore not covered by the same consumer protection laws as funeral life insurance policies.
That is now going to change. The proposed changes will require providers of funeral expenses policies to hold an Australian Financial Services licence. This will knock funeral directors selling these policies out of the game.
The benefit of these changes to consumers will not be substantial. Taking out funeral insurance of any kind is generally inadvisable. You only win if you time your death for when you haven’t paid more in premiums than you will receive in benefits. That’s not something many people are able to do.
It is better to take out a pre-paid funeral, which you buy at today’s price. You only pay for the funeral you want and no additional premiums or add-ons are involved. A pre-paid funeral is also an exempt asset for the pension asset and income tests.
If you don’t have the money to buy a pre-paid funeral, you could set up your own insurance-type account by setting some money aside each week or each month and putting it in a term deposit or other investment account or else you could pay into a funeral fund.