Summary: Most insurance products are not worthwhile for most people; simply self-insuring (building up sufficient savings with what you'd pay in premiums) is the sensible option. Even worse, many insurance products are actually designed not to offer a valuable service, but simply to extract wealth from naive consumers.
Opportunistic industries exploit insurance rip-offs to prey on those least financially-savvy, taking advantage of both their unsophistication and their greater financial insecurity. The funeral products industry is a perfect example. Most well-off or financially-sophisticated consumers avoid funeral products. Instead, the industry targets and feeds off the most disadvantaged or insecure, including indigenous Australians.
This post uses the example of funeral products to highlight this entire category of fraudulent financial products that exist only to extract wealth from those who can least afford it.
Details:
Consumer Affairs Victoria (CAV) recently launched a campaign to try to protect indigenous consumers from being exploited by being sold funeral products (funeral insurance, funeral bonds, pre-paid funerals), particularly door-to-door. It is disturbing to see how profitable and legal these grossly unethical products and industries can be.
Consumer Affairs Victoria produced a video to explain the risks of these funeral products to indigenous consumers:
Sadly, though both Consumer Affairs Victoria and ASIC (via its MoneySmart website) warn about buying funeral products, they are unable to state the plain truth that everyone, especially those who aren't well-off, should avoid buying any funeral product.
Funerals can be expensive so you might choose to plan and save for a funeral now to ease the burden later. But when the time comes you want to make sure the money will still be there and that there will be enough.In reality, you don't need to: think about the different funeral product options or their features, ask questions, or talk to consumer protection agencies about them. You just need to avoid all funeral insurance products completely.
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So remember, see if you already have cover and if you are thinking of getting cover think about different options available and consider which features are best for you ask questions before you sign up and talk to local consumer protection agency if you have any questions.
CAV YouTube: Avoid a funeral RIP off
If you want to ensure family members don't have to pay for your funeral, the solution is to leave written instructions that minimise the cost of your funeral (it costs $1,500 for the most no-frills cremation), and simply retain that amount in a savings account or in your superannuation.
All accurate analysis of funeral products compared to self-insuring via saving your own money demonstrate that funeral products are rip-offs and simply transfer your wealth to profit-seeking businesses which, in the final washup, may not even cover your funeral costs.
According to actuaries Rice Warner, taking out funeral insurance at age 65 could mean your premiums almost add up to the costs of four funerals if you live until 91.
Choice: Funeral insurance options
Government consumer affairs and financial protection agencies are often ineffective with respect to their ability or willingless to constrain predatory consumer products. For example, both CAV and ASIC MoneySmart simply warn about buying funeral products for children, when this should be banned as it is completely unethical and never in a family or child's interests:
When consumer advocates agree an entire category of products are a rip-off, the best response is simply to advise everyone to avoid them and campaign for this industry to be shutdown
The Consumer Action Law Centre has led a campaign for a 13 point reform strategy to fix the funeral product ripoff: Time to end the funeral insurance rip-off: a Consumer Strategy for a fairer deal
It means consumers may be spending thousands of dollars without fully understanding the full range of options open to them, when perhaps the most simple and cost effective option is simply to open a savings account to save for a funeral.
Funeral insurance has been singled out as a problematic product because it is difficult for consumers to assess the real value of the product, including the value of the offer being made. Premiums can be very expensive and a policy may pay out an amount significantly less than the total amount paid over the insured period, which may be years or decades. Marketing and promotion often doesn’t disclose the true cost of the product, or warn about the steep price rises that sometimes apply as the policy holder ages. Commonly, the promotion of some funeral products target anxieties—the fear of outliving one’s savings, the fear of being a financial burden on loved ones, or the fear of losing one’s financial independence. Particular groups within the community, such as the elderly and Aboriginal communities, are key markets for these products.
Action is needed to ensure consumers better understand the choice of products on the market and help them avoid being financially exploited. This strategy identifies steps the insurance industry, regulators, governments and consumers can take to reduce the likelihood of financial exploitation from funeral insurance. Time to end the funeral insurance rip-off: a Consumer Strategy for a fairer dealThis 13 point reform plan will never be implemented to fix the funeral product ripoff. Funeral products are completely unnecessary and only exist in order to extract wealth from naive consumers. If they weren't a ripoff they wouldn't exist. Consumer advocates and financial counsellors should be teaching consumers how to eliminate unnecessary expenditures, minimise necessary ones, and build up increasing savings over their lifetime.
But who will pay for my funeral?
- If you have savings in a bank account, it can be taken out of your bank account after you die.
- If you have superannuation, it can be taken out of your super account, but whoever is organising your funeral may have to fund the funeral upfront and be reimbursed after your estate is distributed.
- If you are so poor you don't have savings, superannuation or any other assets, you most certainly shouldn't waste money on funeral products. Whoever organises your funeral will pay for it. And if no-one is able, the government will pay for a cremation.
See: MoneySmart: Paying for your funeral
What about using life insurance?
If you have very good reasons why life insurance is worthwhile, then it can readily be used to cover funeral expenses. However, as with almost all insurance products, life insurance is rarely worthwhile for most people.
How can I minimise the cost of my funeral?
As an atheist, I'd like to donate my body to medical science. That's certainly an option you can register for or leave written instructions about. See: ABC: Make use of your body when you die
If you just want to be disposed of with minimum cost and fuss, a cheap, no-frills cremation will cost around $1,500. You can leave written instructions that your funeral be as simple and inexpensive as possible. This is actually becoming quite common and there is now a standard process for this. See: The Australian: What is a pauper’s funeral like in 2014?
Further Info:
The Age
> Funeral services and costs 'shrouded in secrecy', university research finds
Consumer Affairs Victoria
Avoid a funeral RIP-off - News alert
Consumer Action Law Centre
Time to end the funeral insurance rip-off: a Consumer Strategy for a fairer deal
ASIC MoneySmart
Paying for your funeral
Paying for funerals booklet (pdf)
Choice
Funeral insurance options
Life insurance buying guide
Redfern Legal Centre
Who pays for funeral expenses? (pdf)
The Law Handbook Victoria
The funeral procedure
The Australian
What is a pauper’s funeral like in 2014?
Australian Government Department of Human Services
What to do following a death
Money Help Victoria
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