When wishing to provide funds for a funeral expense you have three options; 1. Taking out a funeral insurance policy, 2. Investing in a funeral bond or 3. Entering into a prepaid funeral contract with a funeral business. The following summaries set out the major pros and cons for each.
- Funeral Insurance
As funeral insurance is a type of life insurance, you enter into a contract with an insurer and commit to pay premiums over a specified term for an agreed amount of cover. For instance, with Sureplan’s funeral insurance plan, Sureplan Family Fund, you can apply to join up to age 55 and your premiums are guaranteed to never increase and are payable until age 60 – therefore you will know exactly how much you will pay in total premiums.
However, with many other funeral insurers premiums will increase over time. Sometimes premiums will treble over a 10-15 year period which means the cost of a policy eventually simply becomes unaffordable for many people stuck on a fixed income such as a government pension. With no refund of premiums available for cancelled policies, funeral insurance can end up being a costly mistake. Regardless of the gimmicks some funeral insurers will offer such as premium refunds after a certain period, the golden rule should be to obtain in writing before you sign up;
- The amount of cover provided
- The exact details of the premiums payable
- When the premiums are payable until
- The total cost of the premiums.
If an insurer cannot or won’t provide this information give them a wide berth.
- Funeral Bond
A funeral bond is an effective and flexible way to invest or save for a funeral expense. You can either invest a lump sum, make ad-hoc deposits or contribute by regular direct debit payments from $50 per month. Contributions up to $13,000 (as at 1 July 2018) are an Exempt Asset for pension and aged care assessment purposes. You should be aware that after a 30 day cooling-off period your contributions are not accessible.
A funeral bond is a managed fund and members may earn an annual bonus (return) which is credited to their policy and is not personally taxable – the accumulated bonuses, paid out as part of the funeral benefit, are treated as income in the member’s estate.
You will need to appoint a nominee who will receive your funeral benefit on behalf of your estate. The nominee can be changed by advising the funeral bond issuer in writing at any time. Should you nominate a funeral director, but move away from that area, you can simply change the nominee to another funeral director.
When you pass away the funeral benefit is paid to your nominee who applies it towards your funeral expenses. Should the funeral benefit be greater than the cost of your funeral the residual is credited to your estate – if the funeral benefit does not cover the cost of the funeral the balance will need to be made up by your family.
- Prepaid Funeral Contract
Some funeral directors offer the opportunity for you to enter into a contract and prepay your funeral. The contract must list the details of the items included as part of the agreement however often these will not contain larger cost items that the funeral director does not provide themselves e.g. cemetery fees, flowers etc. The monies that you pay will normally be paid into a funeral bond that the funeral director will request that you assign (transfer ownership) to them. Some funeral directors will levy an extra fee to cover the risk that the growth in the funeral bond will not keep pace with their costs.
Should you relocate away from the area that is serviced by the funeral director you will need to request that they release you from the contract and re-assign the funeral bond. Some funeral directors will charge a fee to release you from the contract.
So, it makes sense to only consider a prepaid contract if you absolutely certain you will never need to relocate away from your local area.