Funeral insurance in Australia is actually a form of life insurance, with the only main difference being typically the amount paid out and the name. The difference in these policies is entirely in how they are marketed, and who they are marketed to. There are about 15 funeral insurance providers in Australia.
Why funeral insurance got complicated
This looks just like a life policy - the older you get, the more your premiums are, whether they are stepped or fixed. This increase is usually by about five per cent annually and takes CPI increases into account.
ASIC recently flagged some major problems with the design and sale of funeral insurance in Australia in their report, Funeral Insurance: A snapshot (October 2015). One of the main issues was that consumers would end up paying more in premiums as they age than they would get in a payout (even if they had to cancel the policy because they could no longer afford it) - this is not illegal and not under ASIC's jurisdiction. The other flagged issue was the marketing of funeral insurance often being targeted at elderly and Indigenous Australians - again, certainly not illegal, and when no misconduct exists, not under ASIC's jurisdiction. This has left the funeral insurance industry enjoying carte blanche with vulnerable members of society.
Other research by ASIC found that consumer awareness of funeral cost and insurance was very low - most people didn't compare prices or really understand what they were buying, nor did they understand that there were other ways of paying for a funeral, for example, using those insurance premiums to save up or prepay in instalments.
What is clear from the research is that nobody really understands funeral insurance except the insurers offering it. It's been a pretty cash cow that until recently, hasn't been examined in any depth, since on the surface it seems like a fairly low-key, benign form of insurance. The payouts are so low compared to other forms of insurance, it has largely slipped under the radar.
The research showed that premiums tended to quickly increase once a person hit 50, since stepped premiums were the most common. Anyone aged 80-84 was paying four times as much as those aged 50-54, and these premiums were increasing every year, but to complicate the ethical position of insurers, during a time when a person's income or funds pool was dwindling.
Cancellations for funeral insurance are high. It seems like a good idea, but can quickly become an unaffordable emotional luxury. According to ASIC's research, almost 55 per cent of the policies were cancelled during the first year, with 65 initiated by the customer, and the rest being cancelled due to non-payment. Over half of those with funeral insurance were over 50 and under 74 - not unexpected - but over half the Indigenous customers were surprisingly under the age of 20.
New features being implemented across many insurers, to combat the poor statistics, include flat or level premiums for the life of the policy, and caps - you can't pay more than your benefit is worth. Current customers won't see these changes to their policies, but future customers will. This means change will be slow to observe.
So, what do you need for a funeral anyway?
There is no doubt that a funeral costs money many may not have immediately available to them. Your average funeral costs between $4,000 and $15,000 - no small amount to get your hands on at short notice. But what are we actually paying for?
- The funeral director's fees
- Transport of the body (hearse)
- A coffin
- Death certificate
- In-ground burial or cremation
- Cemetery plot (land)
- Flowers, newspaper notice, wake, celebrant or clergy
- Venue hire for outside events, catering
ASIC's report, Paying for Funerals: how consumers decide to meet the costs (July 2012), explains that there are several ways to pay for a funeral, from prepaid plans, instalments, and even funeral bonds. Superannuation and insurance (including life insurance that is almost always applied by default in superannuation) are also other options, though sometimes a benefit from the latter options can't be paid quickly.
So how did funeral insurance become a thing?
Marketing , naturally! The message being sent is that you'll be a burden, and should feel guilty for not paying for your funeral. How could you! Prior to this marketing push, it was expected that your family would come up with the goods somehow or you would prepare in some other way (bonds, prepaid, life insurance). It is easy to translate guilt into cold hard cash.
Once we are invested in the very emotional idea that we're saving our loved ones the trauma of further debt, the tendency is to try to stick with it, with loss aversion being common. The investment in premiums already paid stops people from switching products, unless the loss from the old product is outweighed by the benefits of the new policy - rare indeed.
The emotional impact of funeral insurance
There is a great deal of emotion that goes into these policies, and while a policy can be a fundamental error of judgement, going back on it can create an ache that many are not willing to impose on themselves.
Those with funeral insurance tended to feel about their cover:
- Ongoingly satisfied
- Emotional closure
- A reluctance to criticise or question the policy or their choice to buy it
- Quiet pride
- Peace of mind
- An absence of guilt
- In control
- Wise for their choice
These are some big feelings for a small insurance policy.
There are many advocacy groups that are pretty disgusted, and vocally so, with an industry that preys on the ill-informed and usually low-income members of our society with emotional manipulation - our old friend guilt. After just a cursory examination, funeral insurance is a product that is really pretty unnecessary for most people.
Funeral insurance is on notice for poor practices and being a relatively poor substitute for other methods of paying for a funeral. The insurers marketing these products may have had their heydey, but their time in the sun may be coming to a close.