Chapter 13: Funeral funds and insurance

Many people worry about the cost of their funeral and the burden this may impose at the time of bereavement. There are different schemes for people who want to make their own plans and financial arrangements in advance, to cover their funeral costs. The supposed benefits need to be considered carefully against the costs, as considerable sums of money can be involved.

Funeral insurance

Funeral insurance, sometimes called a funeral plan, is much the same as other types of insurance, where you pay a fortnightly or monthly premium, which is calculated based on factors such as age and the amount of cover required.

It is paid out in the form of a lump sum benefit to the insured person’s family on their death and can be used to pay immediate expenses, such as the funeral service or outstanding debts.

With these schemes, there is a risk in committing to something over a long timeframe. A person may take out an insurance policy and contribute for a number of years. If their financial circumstances change and/or premiums rise, and they can no longer afford to pay the premium, they may not be entitled to anything, despite the substantial amount they have already paid. Another consideration is that policies will often have a 12-month exclusion period for accidental death, so will not pay out in that circumstance. If you do want to have funeral insurance, it is important to understand what you are getting as policies from different providers will vary.

More information about funeral insurance can be found on the websites of the Financial Rights Legal Service and ASIC.

Insurance is governed by Commonwealth laws, including the Insurance Act 1973 (Cth) and Corporations Act 2001 (Cth).

Contributory and pre-paid funerals

In NSW, funeral funds are governed by the Funeral Funds Act 1979 and all funeral funds must be registered. The NSW Fair Trading website lists all registered funds.

Funds are of two types:

contributory funds — where an amount is paid monthly, or on an arranged plan
pre-paid — where payment is made in a lump sum

The person joining the fund will need to decide on the funeral arrangements they want and agree on a price with one of the registered funds. Sometimes a contract certificate outlining the agreed arrangements will be issued by the fund, or it may issue a payment book that records its rules and conditions.

All money held by the fund operator must be held in a trust account. The trustees can be a company or at least three individuals. The trustee company invests the money in approved securities to keep up with inflation so that the service agreed on in your contract will be provided without additional payments at the time of the funeral. The legislation requires the trustee company to submit annual financial statements and auditors’ reports.

Funds have different arrangements for paying out. Some funds contribute directly to the cost of the funeral, with the amount depending on the agreement. Others pay the money into the estate of the deceased and allow the executor to make funeral arrangements. Money invested in funeral funds is exempt from the pension assets and income test.

If a particular company has been nominated under the contract to conduct the funeral, it is important to let your next of kin know – preferably by including the information both in your will and in another document, since your will may not be read until after the funeral. At the time of your funeral, the company chosen to conduct the funeral will go ahead with arrangements as recorded in the contract certificate. They will receive payment from the trustees after the funeral.

Because different funds offer slightly different deals, it is wise to shop around before deciding on a fund. Some agreements have a 14-day cooling-off period that allows you to change your mind without losing your money. It is also sensible to check the arrangements relating to withdrawal from the fund. Some issues you should consider are:

Do you get all of the money back, including principal and interest?
How long will it be before the money is returned?
Is an administration fee charged? If so, how much?

Funeral fund cancellation and refund

A pre-paid contract can be cancelled and the money refunded under certain circumstances, including:

if the funeral director has gone out of business
where the estate has arranged for another funeral director to conduct the service because they did not know that there was a pre-paid arrangement.

Under the Funeral Funds Act, the contract may stipulate other grounds for refunds. Most contracts cover situations where a person moves to another state or town. They usually require the funeral to be conducted by another provider, rather than allowing for a refund.

An alternative to signing up for a funeral fund is to set up a separate savings account and deposit the necessary funds, and to specify in your will that this account is to be used to fund your funeral. For some people this may be the safest and easiest way to make sure they get the kind of funeral they want.

Funeral funds before 1979

Some funds that existed before the Funeral Funds Act continue to operate, but they cannot accept new subscribers or new payments from existing subscribers. Problems can arise with some of these funds, particularly where the agreed payment is no longer enough to pay for a basic funeral. The family or next of kin will need to pay the difference, or the deceased may be referred to the government contractor for a destitute burial. Before 1979, funeral funds operated both cash benefit schemes and non-cash benefit schemes.

Under a cash benefit scheme, when a member dies, a set sum of money is provided for the funeral. Such a scheme may be a membership benefit for a particular organisation (for example, a trade union) or a contribution may have to be made to the fund before death. Some cash benefit schemes are organised on a contributory basis where the member makes regular payments. Possible problems with this sort of scheme include:

benefits not being paid if the member failed to keep payments up to date — years of contributions may be lost and no benefit received from that fund
no provision for the member to cash in the contributions to the fund — the only benefit available is the contribution towards the funeral
the benefit that is offered by such a scheme is limited to a set sum.

For non-cash benefit schemes, usually run by the funeral industry, the performance of the actual funeral or cremation is the benefit — no money is paid out at the time. As with the cash benefit schemes, difficulties may arise if you want to cash in your contributions or you fail to make regular payments to the scheme.

For example, you may have paid a lump sum, or be making weekly or monthly contributions for a certain type of funeral or cremation. However, when the time comes, the particular funeral or cremation may actually cost far more and the scheme will not cover it. The administrators of the scheme often cover themselves against this eventuality in the contract, which can lead to the following situations:

A rise and fall clause, which means you will have to pay an additional sum to receive a funeral of the standard and type originally chosen.
A funeral at a set cost, which could mean that the funeral will be one worth, say, $400 at today’s rates which would be a lesser quality funeral than the one originally specified.
Services provided on production of a pre-purchased certificate, which may not be transferable and cannot be used for someone else. The value of the certificate if cashed in, is usually much less than the purchase price.
A requirement to use a particular funeral director. If you die outside the funeral director’s operating area, the contract may not allow another provider to conduct the funeral or may stipulate that it is be conducted by a particular provider.

If a specific company has been nominated under the contract to conduct the funeral, it is important to let your next of kin know — preferably by including the information both in your will and in another document, since your will may not be read until after the funeral. The company chosen to conduct the funeral will go ahead with arrangements as recorded in the contract certificate and receive payment from the trustees after the funeral.