Insurance |

By: Equus Foundation  05/12/2011

People set up life insurance for a range of reasons. Often people will set up life insurance once they have children – providing a replacement income in the event of death is very common. Or a mortgage can prompt a need for life insurance – typically couples will protect each other if they share a debt.

Another reason that people set up cover is to provide for funeral costs. However while this is common, it is often not a particularly good use of life insurance. We’ll take a look at why.

First, adding some cover to an overall package to cover funeral costs can be a good idea. For example if you were getting $500,000 cover to take care of a mortgage and provide for family, adding $10,000 for funeral expenses will cost very little, and can be a wise choice, especially if your savings are not enough to cover this type of cost.

In many cases though, people specifically get life insurance just to cover their funeral, often choosing a figure like $5,000 or $10,000 as a total cover level. The main problem with this approach is that most life insurance plans have a “stepped” premium, which means that premiums increase from year to year, meaning that an 80 year old will pay around 4 times the cost for their insurance that a 70 year old pays. This can become very costly, and often means that the insurance is not affordable at the very time it is needed most.

Some life insurance plans offer a “level” premium option. This means that costs do not increase from year to year, but rather remain the same. However often a level premium will expire at age 80 and become a stepped premium – leading to the same problem as outlined above.

For this reason, if you are considering setting up life insurance to cover funeral costs, it’s important to ask for a long term projection of costs, to make sure life insurance really is a more cost effective option than simply regularly saving for a funeral fund yourself.

The information in this article was current at 02 Dec 2011

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