Prepaid funerals, funeral bonds and funeral insurance compared

Prepaid funerals, funeral bonds and funeral insurance are often talked about as if they are interchangeable ways to get ahead of funeral costs, but they work quite differently, and confusing them can be an expensive mistake. This is a plain description of how each one works, not advice on which is right for you. For guidance on your own situation, Moneysmart, the Australian Government's financial guidance service, and Services Australia are the right places to go.

A prepaid funeral plan is an agreement made directly with a specific funeral provider, where you choose and pay for your funeral arrangements in advance, generally at today's prices. Regulation of prepaid funeral funds sits with each state and territory rather than being uniform nationally, and the rules differ. In New South Wales, prepaid funeral funds are governed under Part 4 of the Funeral Funds Act 1979. In Victoria, Consumer Affairs Victoria sets disclosure requirements and rules around what the money can be invested in. In Tasmania, a funeral trust must be approved by the Director of Consumer Affairs and Fair Trading, who keeps a register of approved trusts. Because the arrangement is made with a specific provider, a prepaid plan generally only makes sense if you are reasonably confident that provider will still be operating, and able to deliver the funeral you have paid for, when the time comes.

A funeral bond is a different kind of product: an investment specifically set aside to help cover funeral costs later, rather than an arrangement with a particular funeral provider. One advantage of a funeral bond, for anyone receiving an income-tested pension or allowance, is that it can be exempt from the Services Australia assets test up to a set limit, which the Department of Social Services reviews and adjusts each year, currently around $16,250. If you hold more than one funeral bond, you can generally choose which one or two to nominate as exempt, up to that combined limit; anything beyond it, or a bond not nominated, is generally treated as a normal financial asset. Because the exemption limit and rules can change, it is worth confirming the current figures directly with Services Australia before relying on them.

Funeral insurance is different again. It is a type of life insurance policy, where you pay a regular premium in exchange for a payout, generally to a nominated person, when you die, intended to be used towards funeral costs. Unlike a prepaid plan or a bond, the premium is not a savings contribution towards a fixed cost; it is an ongoing insurance payment, and premiums commonly increase as you get older. This is the specific point ASIC and Moneysmart have repeatedly warned Australians to understand: if you take out a policy and live for a good number of years afterwards, the total amount you pay in premiums can end up being more than the payout your family eventually receives. Moneysmart's own published example illustrates this: a policy taken out in someone's late fifties can see the fortnightly premium roughly double within about a decade, without the payout necessarily increasing to match, and without any guarantee premiums stop once you have paid in enough to cover it.

None of this means any one of the three is a bad choice, and each can suit different circumstances and priorities. It does mean it is worth being clear, before committing to anything, about exactly what you are buying: an arrangement with a specific funeral provider, an investment earmarked for later use, or an ongoing insurance premium. Reading the product disclosure statement or plan terms carefully, and checking current rules directly with Moneysmart, ASIC or Services Australia, is a sensible step for any of the three, and this article is general information only, not financial or legal advice for your situation.

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