Fixed vs Age based premiums

When you think about the kind of funeral you want, you think about your friends and family who would be saying goodbye, the kind of music you would want played, who would make the speeches and the overall celebration of your life. But the one thing you may not have seriously considered, which is just as crucial as everything else, is the cost. While a simple funeral in Australia costs around $4,000, any trimmings like a nice casket, floral arrangements and burial plans can run up to $15,0001. With this in mind, more and more people are turning to funeral insurance to make sure that this cost isn’t a burden to the loved ones you leave behind.
The idea of funeral insurance is simple. At the time of your death, a lump sum (usually between $3,000 to $15,000)2 is paid to your beneficiaries to cover the cost of your funeral and other expenses. However there are also other benefits to funeral insurance, including:
  • immediate cover is usually guaranteed for residents between 18 to 79 years old (cover for accidental death only in the first 12 months; cover for death by any cause thereafter);
  • no medical or blood tests are required for acceptance; and
  • there is a cooling off period of usually 30 days; and
  • money is paid quickly to your loved ones.
Funeral insurance is a particularly good idea if you aren't certain you can save enough to cover all your funeral costs by the end of your life. As an added benefit, some policies allow you to choose a structure that works for you – fixed or age–based premium policies.

Fixed premium rate funeral insurance

Under a fixed premium rate policy, the premium for your funeral insurance plan is determined at the time that you apply. Most policies include annual automatic indexation of the benefit amount in the range of 3–5% per annum to ensure the benefit amount keeps pace with cost of living. This can generally be opted out of on an annual basis. While your premium will increase as your benefit amount increases, it will always be proportionate to the increase. If you choose to opt out of the automatic benefit amount increase your premium will remain fixed. Premiums under a fixed rate policy will generally start off higher than that of an age–based premium option.
Fixed premium policies are great for people who want to manage their costs and don't want any surprises in later years. This option makes it easy to manage your budget because you know the premium rate won't change as you get older and you can choose each year whether you want the cost of living protection or if you’d prefer to keep your premiums level.

Age–based funeral insurance

Unlike the fixed premium rate option, an age–based funeral policy automatically increases each year to take your age into account. Of the two options, it is more affordable to start with but the premium will be recalculated and increase each year. The increase in your premium will take into account not only your age, but also the increasing cost of living. This means that it will always be accompanied by an increase in your benefit amount.
Age–based funeral policies usually increase your premium only until you turn 79, after which time the premium remains the same until you turn 90. Once you turn 90, you'll no longer need to pay premiums at all but your cover will remain intact.

Things to keep in mind

Remember that funeral insurance is not actually a savings account for funeral costs, but that you're purchasing an insurance policy to cover those costs when you pass away. As with other types of insurance, this means you need to keep up to date with your premium payments or you could forfeit all the payments you've made to date. It is also possible that you could pay more into the policy than you will receive as a claim payment when you lodge a claim. Be sure to read the Product Disclosure Statement for other terms and conditions.
For the pros and cons of not only funeral insurance but other types of funeral plans, go to moneysmart.gov.au.
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  1. Insurance Council, Paying for your funeral
  2. Insurance Law, Top 10 Benefits of Seniors Final Expenses Insurance

These articles are provided as reference material to allow more informed decision making, but are not intended as being a complete source of information on any topic. All readers should make their own independent analysis on the topic to make sure they have considered the aspects that are important to them.