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Funeral Bonds, Pre-Paid Funerals & Funeral Insurance: Whats the Difference?

We explain the difference between funeral bonds, pre-paid funerals and funeral insurance as 3 different options for financially preparing for your funeral.

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3 Ways to Save on Funeral Costs

Whilst we might like to avoid thinking about them, funerals are as inevitable as they are costly. In planning ahead we can minimise the financial and emotional burden of our send-off, for both ourselves and our loved ones. Taking the powerlessness out of death, and instead making choices while we live. Choices about our legacy, choices to support our families and choices that save money for their futures. Read on for why’s and how’s of preparing your funeral in advance.

Why make funeral preparations in advance?

1. Reduce the admin strain for loved ones at an already difficult time

2. Re-shift the focus to celebrating you in a meaningful way

3. Make savings

Funerals can be costly. And according to the 2019 Australian Seniors Cost of Death Report, these costs are growing at an alarming 6-11% rate each year since 2011. Basic cremation costs alone have also more than doubled from $1,435 to $3,108 in this same time.

Whilst there's no way to remove the inevitable cost of a funeral entirely, there are ways to instead minimise and manage the financial burden. We discuss the pros and cons of funeral bonds, funeral insurance and pre-paid funerals as three different ways to do this.

Funeral Bonds

What are Funeral Bonds?

A funeral bond is an investment product that helps you to save for a funeral by only providing benefits upon your death. You’ll be committed to a monthly payment or a lump sum investment up front. Your funds are then invested until the time they’re needed, and at that time, only released to your estate or to an appointed funeral director. The money must be held in an independently managed funeral fund, and any interest it accrues must be added to the capital.

Advantages of funeral bonds:

  1. Reduce the financial strain for loved ones

Whilst it might seem counterintuitive to invest in death plans whilst still alive, funeral bonds offer a secure way to minimise the financial burden on those you’ll eventually leave behind. Allowing you to take care of these loved ones, even after you're gone. It's important to let them know about this decision, so that whoever administers your estate knows where to send the funds when the time comes.

2. Secure Savings

Unlike funeral insurance, if you miss a payment or stop contributing to a funeral bond fund, the money saved is not forfeited and can still be used under your name to pay for your funeral.

3. Exempt from asset test

According to the Department of Veteran Affairs, the current funeral bond threshold in Australia is $14,000 and is adjusted each July for cost of living. As with pre-paid funerals, discussed below, funeral bonds are exempt from the asset test that is used to assess pension payments (up to a maximum of $12,500).

Disadvantages of funeral bonds:

  1. Unprotected from rising costs

Due to the increasing costs of funerals and inflation, your investment isn’t guaranteed to cover the entire cost of your funeral when the time comes. For instance if you’ve saved up $10,000 for your funeral but it ends up costing $12,000, your estate will still need to cover the remaining $2000. Some people, despite their best intentions to plan ahead, may still leave their loved ones with a balance if costs rise beyond what the bond has put aside for your funeral.

Learn more about funeral bonds from Services Australia here.

Pre-paid Funeral

What is a pre-paid funeral?

A pre-paid funeral is a funeral planned and paid for in advance with the funeral director of your choice. When you have discussed and planned all the details with your funeral director, you sign a written contract and pay for the funeral at today’s prices.

Advantages of a pre-paid funeral?

  1. You can pay for for pre-paid funerals in instalments

Pre-paid funerals prevent the need to pay for the entire funeral in one go. Instead offering to spread the financial burden in an instalment plan, generally over the course of 1-3 years.

2. Security

The funeral director does not hold on to the money you pay for the pre-paid funeral. Instead, it is held by an independent entity, such as a friendly society or trustee company, who keeps the money secure until it is required to be released to the funeral director.

3. Does not contribute to pension payments

Pre-paid funerals are not considered an asset, so aren’t taken into account when assessing any pension payments you might have.

Safewill can help you arrange a prepaid or direct cremation service that takes care of all the essentials so you can plan a farewell that’s true to you.

Learn more about Safewill’s prepaid cremations here.

Funeral Insurance

What is funeral insurance?

Funeral insurance is a type of life insurance that pays policyholders or their loved ones a lump sum upon death to cover funeral expenses.

In simply paying small fortnightly ,or monthly premiums with an average of $20-40 over time, you can help to break down funeral costs for your family.

On the other hand, funeral insurance can be expensive. While initial premiums seem small, the amount can easily balloon as you age. Meaning the total costs of the premiums will be more than the benefit your loved ones get when you pass away. For instance, if you took out insurance when you were 60 and passed away when you were 90, you could end up paying over $85,000 in premiums for an average final payout of only $6,000.

Funeral insurance can also be risky. If you stop making payments, you’ll lose what you’ve already paid. As shown in a 2015 study by the Australian Securities and Investments Commission (ASIC), 80% of people lose all of the money they pay to their funeral insurance policy. Highlighting it to be a risky investment which could see your life savings lost if your unable to continue the payments.

Which one is best for you?

In light of funeral insurance risks, we rate prepaid funerals and funeral bonds as the most financially-savvy way to plan for your funeral. But which is best for you; prepaid funerals or funeral bonds?

You might consider a prepaid funeral if:

  • You want to have all the details of your funeral planned out ahead of time.

  • You want to have all the contracted costs of your funeral paid ahead of time so your loved ones won’t have to spend anything.

  • If you want your investment in your funeral to keep pace with inflation and increasing funeral costs.

You might consider a funeral bond if:

  • You’d rather not think about planning your death and funeral but want to ensure your loved ones are financially prepared for your death.

  • Depending on how your investment performs you could outperform inflation and increasing funeral costs and cover the entirety of your funeral with perhaps some cash left over.

Regardless of which option you choose, financially planning for your funeral can save your loved ones money and stress at an already distressing future time. Allowing you to lock in lower fixed prices, avoid rising costs and save more of your money for the living, left to carry on your legacy.

Safewill is here to help

Whether you’re just exploring or considering a direct or prepaid funeral, Safewill can help. We’re here to thoughtfully and affordably guide you through some of life’s toughest decisions.

For more information on coping or preparing for end of life matters, Safewill can help. Get in touch today for a one-to-one on 1800 103 310 , or start a chat with us online.

Last updated 13th December 2022
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Hannah Comiskey
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