Glad to see that ASIC are looking at funeral insurance

Wherever I seem to be, whether it be in a plane or watching the odd bit of TV I seem to be bombarded with advertisements for funeral insurance.

On the one hand I have been a beneficiary of the cover, for when I was 13, my father died and he had cover in place which meant my mother did not have to pay for the funeral, which was a Godsend. The death of my father also triggered free funeral cover for my brother and I until each of us reached the age of 21 or 25, I cannot recall which.  I then continued the cover paying weekly or fortnightly then after a few years, I got a note saying that the cost of administering the payment program was prohibitive and they offered for one very modest premium that I would have life time cover. I took this offer up. I thought this was all very fair. The big difference was that this was operated by a Friendly Society rather than an insurer with shareholders.

When I looked at the premiums mentioned in a couple of these ads and assuming no rate increase each year for getting older, that if you were 40 years and lived to the current life expectancy for a male you would have paid around $140,000 in premiums for a $6,000 sum insured. On a second one, if you joined at 60 and lived to 72 you would have paid preimiums of around 4 times your pay-out! I do stress that this is just a back of an envelope calculation.

This seems on the face of this admittedly very rough analysis that it was preying on the less fortunate in the community who would be better off putting the money in the bank, in a jar in the cupboard or buying some old fashioned whole of life cover. If you started saving the current premium at aged 40 and lived to say 72 you could have a funeral to rival a top US mobster.

Seriously, I am sure the family of the deceased could put this money to much better use. The first two options will of course let you down if you die before you have saved the cost of a funeral.

I could not believe that my back of an envelope calculation was correct and so I earmarked this as a project for Angus Stewart, one of LMI’s analysts and I to look at after the June 30 peak advice period. With ASIC onto the case, I will leave the matter lie for the moment but watch what goes on with interest.

One final point I would make is that it clearly must be a very profitable class of insurance as I note that some insurers are prepared to allow customers to pay by the fortnight but will not offer this in any other class of insurance.