Life insurance vs funeral insurance

What is the difference between life and funeral insurance?

Life insurance pays out a large lump sum to you or your family if you die or, in some cases, if you're diagnosed with a terminal illness. You can customise that lump sum to suit your needs, but it's usually between $100,000 and $15 million.

It's intended to help your family cover general living costs that would be difficult to meet without your usual earnings - for example, the mortgage, rent, school fees and so on.

Funeral insurance has a lower benefit limit, usually around $15,000. It's also paid out to your nominated beneficiary when you die or, in some cases, when you're diagnosed with a terminal illness.

The aim is to help your family cover the cost of your funeral, but they can spend the benefit however they choose. There's no legal requirement for them to spend it on your funeral.

Life insurance tends to cost more than funeral insurance but this is because it covers more.

Key differences	Life insurance	Funeral insurance
How does it pay you?	In one lump-sum	In one lump-sum
When does it pay out?	When you pass away or, in some cases, if you become terminally ill	When you pass away or, in some cases, if you become terminally ill
How large is the payout amount?	Usually between $100,000 and $15 million	Usually between $3,000 and $15,000
How soon does it pay out?	The average claim time for life insurance purchased directly from an insurer is 2.6 months. However, if your policy comes with funeral advancement, it should pay out a smaller lump sum within 14 days.	The average claim time for funeral insurance purchased directly from an insurer is 0.7 months.
What can it pay for?	Anything your beneficiaries choose. Commonly, it’s used to clear debts, pay for housing costs, and cover everyday living expenses.	While it's intended for your funeral, the benefit can be used in any way your beneficiary chooses.
How are my premiums calculated?	Your age, health, medical history, smoking status and the benefit amount you choose will all impact your premiums. You'll usually have the option of stepped premiums (which go up each year) or level premiums (which stay at a similar price throughout the length of the policy).	Usually based on your age and benefit amount. You can also choose between stepped and level premiums.
Are premiums capped?	No.	No. However, some policies offer a value promise to ensure you never pay more in premiums than the amount you're covered for.
What added benefits does it sometimes come with?	A funeral advancement benefit, where you receive a small lump sum within 14 days to help cover funeral costs. Some policies offer trauma and disability (TPD) protection. Grief counselling benefits for your family. Ability to pause payments your cover temporarily.	Extra payouts for death by accidental injury. Value promise, where your family will either receive the sum insured or your total paid premiums - whichever is higher. Multi-policy discounts
Are the premiums tax deductible?	No	No
Is the benefit payment taxed?	No	No
What's the application process like?	Acceptance isn't guaranteed. You'll be asked to disclose your age, smoking status and medical history, which will determine whether you’re eligible for cover, as well as the cost of your premiums.	Relatively straight forward. You may need to meet age and residency requirements.

What costs more? Life insurance or funeral insurance?

In most cases, life insurance is more expensive than funeral insurance. However, depending on your age, chosen benefit size, and health status, you might find some life insurance policies are a similar price to funeral insurance. Your own quote will differ, this should be used as a guide only.

Policy	Monthly premium for 50 yo	Monthly premium for 60 yo
Funeral insurance of $5,000	$27.79	$38.51
Funeral insurance of $15,000	$83.36	$115.54
Life insurance of $100,000	$23.09	$71.47
Life insurance of $500,000	$94.95	$310.92

Quotes are based on the average of three policies, using the information of a non-smoker with no medical conditions. Last checked October 2024.

Key differences in eligibility

Life insurance

There are a number of eligibility criteria for life insurance, including age, occupation, health, and lifestyle factors.

Funeral insurance

Eligibility for funeral insurance is much broader. Generally, you need to meet specific age requirements and be an Australian resident.

Key differences in payouts

• Life insurance has high-value payouts, usually hundreds of thousands of dollars, or even millions. It is intended to help your family cope financially without your income. It is typically used to pay the rent or mortgage, and cover general living expenses.
• Funeral insurance has lower-value payouts, usually no more than $15,000. It is intended to help your family cover the cost of your funeral, but they can spend the benefit however they choose.

Life, funeral or both?

How standalone life insurance works
Standalone life insurance will provide a large lump-sum payment to your family when you die, typically between $100,000 and $15 million. The vast majority of life insurance policies also come with a funeral advancement benefit, which is very similar to funeral insurance.

How standalone funeral insurance works
Standalone funeral insurance pays out a lump-sum benefit to your beneficiary, usually between $5,000 and $15,000. It's intended to cover the cost of your funeral so your family aren't out of pocket, but they can use the benefit however they like.

How life insurance with funeral insurance works
Generally, it's not required to have separate life and funeral insurance policies and the vast majority of life insurance policies include a funeral advancement benefit which is essentially a stand-in for life insurance. Even if they don't include this component, your family will be receiving a larger lump sum which can help with the cost of your funeral.

Funeral vs life insurance: things to be mindful of

• Funeral insurance can end up costing more in premiums than the actual funeral would cost. You may want to consider alternative options, such as a pre-paid funeral or funeral bonds.
• Depending on your health or lifestyle, you may find you're ineligible for life insurance. However, funeral insurance has much broader eligibility requirements.
• Life insurance can include many additional benefits, such as injury and disability cover, funeral advancement, and counselling benefits.
• The cost of life insurance can increase significantly over time, if you opt for stepped premiums. Be mindful of the affordability of your policy now and in the future.
• If you opt for funeral insurance, look for a policy with a value promise to ensure you don't end up putting more into the policy than your family ultimately receives.

Where to buy a life or funeral insurance policy

Life insurance options

Direct: You can purchase life insurance directly through the insurer, usually online or via phone.
Broker: Insurance brokers can help find more tailored life insurance that may be better suited to your specific needs - for example, any health conditions you may have.
Super: Most superannuation funds offer life insurance to their members. Although they are generally less comprehensive, costs are lower and premiums are deducted from your super.

Funeral insurance options

Direct: The most common way to purchase funeral insurance is directly from the insurer.
Broker: Some specialist brokers can help you find funeral insurance that's right for you.

FAQs

• Is it better to get a funeral plan or life insurance?

  It depends on your circumstance and specific needs. If your family is financially dependent on your income, life insurance might be better. If your death won't significantly impact their finances, but you want to protect them from funeral costs, funeral insurance might be better.

• Is funeral insurance worth the money?

  If you choose to take out funeral insurance, look for a policy with a value protection which ensures your beneficiaries will receive, at the very least, the full amount you paid into the plan.

• Do you need funeral insurance if you have life insurance?

  Most likely, no. Most life insurance policies include a funeral advancement benefit so you would not need funeral insurance.

• What’s the key differences between life insurance and funeral insurance?

  Life insurance pays a large lump sum to help your family pay off significant debts and cover general living expenses. It's well suited to people who have a family that is financially dependent on them. Funeral insurance pays a much lower lump sum but can help your loved ones cover the cost of your funeral, so they're not out of pocket.

• What are some of the disadvantages of funeral insurance?

  You may end up paying more into your policy than you'd like to spend on a funeral. If you cancel your policy, it's likely you will lose the money you paid to the insurer. Some people consider pre-paid funerals as an alternative.