Funeral insurance complaint shows older Australians at risk of losing thousands

Buried away in Australian Financial Complaints Authority (AFCA) rulings is a case that illustrates a real problem for older Australians and shows just how easy it can be to lose money on funeral insurance.

The case in question revolves around a pensioner who purchased $10,000 worth of funeral cover and ended up paying nearly $23,000 in premiums. The AFCA ruled against the pensioner after finding that TAL, the insurer, did not mislead him or make an error. There’s no suggestion either that TAL did anything wrong, but what the case does show is just how problematic funeral insurance is as a product.

So why would somebody take out funeral insurance?

Funerals are, put simply, very expensive. Moneysmart estimates that the average funeral can cost anywhere from $4000 to $15,000. And that can cause major financial issues.

In 2023, Australian Seniors commissioned a Cost of Death report that showed one in three over-50s who had to help pay for a funeral experienced financial hardship as a result, while funeral costs had risen by 20 per cent since 2019. You can debate the existence of the afterlife or ghosts, but the cost-of-living crisis can haunt your family long after you’ve gone.

With these kinds of costs, it’s no wonder many of us are looking to shield our families and loved ones from thousands of dollars worth of expenses after we pass away.

It’s exactly this kind of financial motivation that prompted the pensioner featured in the AFCA complaint to take out funeral cover.  

A complaint two decades in the making

This AFCA complaint started in 2006 when the man had just buried his ex-wife. Like many of us, the death of somebody we’ve been close to prompts us to think about our own future and, in this case, the pensioner had seen that his ex-wife had some form of funeral cover. He wanted something similar, so his partner and children didn’t have to pay for the cost of a funeral.

The policy was initially for $6000 worth of cover and at some point was increased to just over $12,700, before being lowered in 2023 to $10,000 in benefits to be paid out.

Fast forward 18 years and this policy holder is now in his mid-80s and still very much alive. By this stage he’s paid over $22,800 in premiums. Or, to put it another way, $10,100 more than the payout his family would get to cover the cost of his funeral.

It’s worth noting at this stage that it’s not the AFCA’s job to rule on the suitability of the product, but to deal with complaints and disputes. In this case, the pensioner alleged that his insurer had told him he wouldn’t have to pay any more premiums once his payments reached the amount covered. The insurer had phone recordings and correspondence going back to the original call in 2006, and AFCA found no evidence that the policy holder was ever told this, misled or that the insurer made an error.

So our policy holder is left with two options. He could cancel the policy. But then he would have spent nearly $23,000 and his loved ones would still need to pay for the funeral. Or he could continue to pay premiums until he passed away. And while his family would get $10,000 towards the funeral, they’d have had more if he’d put the money into a low interest account.

To quote the AFCA judgement: “The policy operates like most other kinds of insurance. For example, if a person has car insurance for 10 years, and does not have a crash, then lets the policy lapse, they will get no money back for their premiums.

“This insurance policy works in a similar way. If the person covered under the policy had died in the earlier years of the policy, the benefit would exceed the total premiums paid. If the policyholder lives long enough, the benefit will be less than the total premiums paid.”

But funerals are also not the same as cars. Most of us accept, however begrudgingly, that there’s a reasonable chance our vehicle can get damaged or stolen so insurance is necessary even if we never need to claim it.

On the other hand, the human race, last time anybody checked, has a 100 per cent mortality rate. That means we’re all going to die and somebody will have to carry the cost of it. It’s just a question of when, who and how much.

And this is the issue that affects thousands of older Australians who hold funeral cover. By trying to do the right thing by their families, they’ve actually ended up severely out of pocket.

Those of us who’ve covered the personal finance sector for some time have seen plenty of warnings about funeral insurance as a product. 

In 2015, the Australian Securities & Investments Commission (ASIC) released a report into funeral insurance, which highlighted the risk that policyholders would end up paying more than the policy was actually worth. And in 2018, a royal commission heavily criticised the product, suggesting “policies gave little value to consumers”. It also recommended that ASIC might want to consider intervening.

And yet, in 2024, ASIC’s own MoneySmart site still gives the following advice around funeral insurance:

“Funeral insurance can cost you a lot more than the benefit your family will receive. And if you stop making repayments, you lose what you’ve already paid.

“Consider your other options before taking out this type of insurance.”

What’s more, MoneySmart also highlights a number of other options to help cover the cost of a funeral, including prepaid funeral plans and funeral bonds. Superannuation is another way to help cover funeral costs, although it’s not a quick process, while some life insurance policies come with a funeral advancement feature, where beneficiaries can get some of the payout early, specifically for funerals. And, yes, some funeral insurance policies do cap premiums at the benefit level.

In short, it’s not exactly as if funeral insurance exists out of necessity or a gap in the market. Other than regulation changes or companies deciding to discontinue funeral cover products, it’s difficult to see any way for our 80-something complainant and others like him to recoup their losses if they’ve paid thousands more than their family will ever get back. 

For the rest of us, AFCA’s ruling is another big 20 foot flashing neon warning sign to avoid funeral cover at all costs. 

Have you taken out funeral insurance? Do you know somebody who has? What plans have you made, if any, to pay for your funeral? Let us know in the comments section below.

Also read: Funeral costs are rising. What are your options?

Disclaimers:

Any advice in this article is general in nature and doesn’t take into account your specific circumstances. Always check with a financial professional before making any decisions.