Know the Differences between Life and Funeral Insurance

Understanding Life Insurance

Insurance is not always about protecting property – it can also be about preparing for the future. When it comes to funerals, for example, it is possible to ensure your family is financially covered to cope with the implications of covering the costs of a burial or cremation. But with life and funeral insurance to choose from, which one best serves the purpose?

The answer to the question rests on more than one factor. The obvious difference, of course, is that funeral insurance is for a specific purpose rather than a sum, while the other is for a specific sum rather than a purpose. But there are several other differences that everyone considering the choice between life and funeral insurance should be aware of.

So, here we take a look at some of the key differences that everyone considering the issue should take on board.

Understanding Life Insurance

To fully understand the differences between life and funeral insurance, it’s important to have a good grasp of the elements of a typical life insurance policy. Surprisingly, despite it being one of the most common insurance policies to get, there are some aspects people are unaware of. In fact, there is a tendency amongst Australians generally to leave the specifics of insurance to the experts – something that even the experts would not recommend.

Quoting figures from a 2008 study carried out by OnePath Life, some 25% of Australians did not know where to start when it comes to selecting a life insurance policy. Meanwhile, in the Life Insurance Report 2010 from Lifebroker, just 23% of Australians admitted to being extremely or very worried about the financial impact of premature death, either from an accident or an illness. The majority (54%) admitted to not being worried much or at all.

The result of this apathy is an unawareness of the specific advantages of getting life insurance, and by extension how life and funeral insurance differ. For a start, the options and types of life insurance can be extensive. Choose a term policy and you are covered but only for an agreed period, after which the benefit becomes void, or get a permanent policy which will continue for agreed periods of time, after which the policy may be cashed in.

However, there are some clear pros and cons that life insurance has in comparison to funeral insurance, such as:

Pros

  • Lump sum pay outs mean many financial issues – including a funeral – can be dealt with, so obviously, the payout is going to be significantly more.
  • More affordable contribution rates, especially when you consider the wider range of protection offered.
  • Difference between total contribution and actual insurance payout figure is much narrower.
  • Full protection is provided even in the case of a sudden death.
  • Ability to access accumulated cash values is a key difference between life and funeral insurance. Many insurers provide policies that allow you to cash in certain coverage aspects when you need them. It may mean you lose the death benefit but funds are accessible in emergencies.
  • Insurance loans may also be available, which allows you to access funds as a loan at a low interest rate and flexible repayment terms. The advantage is that the death benefit is not lost.
  • Payouts do not have to be after death, but at the time a terminal illness has been diagnosed. There are conditions which should be discussed with your insurance company, but it means there is a way to fund medical treatment.
  • Policies can include income protection, covering 75% of the salary of the claimant when he or she is temporarily unable to work due to sickness or injury.

Cons

  • Health issues can make coverage quite expensive. In fact, the costs may become prohibitive.
  • Age can also have a prohibitive influence over the term of a life insurance policy.
  • Payouts may not be very fast, meaning funds are not released until long after the funeral. That means family members have to cover the costs until the payout is received. To avoid this situation, a specific funeral benefit clause needs to be agreed and included in the policy contract.

Understanding Funeral Insurance

You might wonder what exactly funeral insurance is. Well, as the name suggests, it is a policy designed to protect your loved ones against the sometimes debilitating costs associated with funerals. Also known as burial insurance, the policy covers the costs of things like the casket, the flowers, and a host of other aspects to a ceremony that can cost a significant amount.

It is similar to prepaying your funeral costs, but without having actually decided on a particular funeral package from a funeral home. Of course, you can always go to your local funeral home and do so, but the insurance policy sets a service price limit and after that the service specifics are up to you.

However, a key difference between life and funeral insurance is that the insurance premium is only to be used to pay for the funeral. So, if you have coverage for $10,000, and your funeral costs $7,500, then the payout will be $7,500.

There are also several other pros and cons that you should keep in mind:

Pros

  • Funeral cover guaranteed, which means total peace of mind for family members who face no financial pressure
  • Monthly and weekly contributions can be very low. It depends on your age and the policy, but a 50-year-old may make weekly contributions of just $4 per week ($225 per year); a 70-year-old could pay just $12 per week ($627 per year)
  • Fast benefit payouts mainly due to the timeliness of a funeral ceremony. Payments are made as soon as the claim has been approved, which itself can be very quick.
  • Payouts may triple in the event of accidental death. This depends on policy terms, but it is designed to meet demands in the unlikely event that a freak accident occurs.
  • A medical examination is usually not required, so even those with a serious illness can successfully get coverage. It may affect the contribution payments, but it’s one of the clear positive differences between life and funeral insurance.
  • Age is also irrelevant in terms of successfully getting coverage.

Cons

  • Actual contribution can dramatically outweigh funeral costs. According to research by Combined Pensioners & Superannuants Association (CPSA), a $6,000 funeral ceremony can cost $140,000 in contributions if the policy holder started at 50 years old and died at the age of 90 or older.
  • Age does mean an increase in weekly and monthly contribution rates. As the CPSA report shows, while a 50-year-old pays $225 annually, a 78-year-old might pay $1,120 over the same period – that’s about five times more.
  • Inflation protection is an option that could increase the contributions even further. The factor (usually set around 5%) is designed to ensure the payout realistically matches a required sum – for example, a $6,000 funeral service today could cost $30,000 or more 40 years from now.

Hamilton Brokers Can Guide You

Making sure you are properly prepared for the financial demands of a funeral takes some careful planning. At Hamilton Brokers, you can get the expert advice needed to make the right choice between life and funeral insurance. That way, you and your loved ones can enjoy complete peace of mind.

We are the leading name in insurance matters operating in the ACT, with access to Australia’s top six insurance providers. So, we are well placed to find the very best policies available at the most affordable premiums.

For more on our range of life insurance, fill out our online enquiry form to request information, or call us directly on (02) 6124 1250.

This information may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it.