Q I am 78 years old and receive a small Aged Pension.  My husband died 3 years ago.  Whilst I am not planning on dying in the near future, I want to ensure that my family is not burdened by the costs of my funeral at some stage in the future.  Should I buy funeral insurance or pre-pay my funeral directly with the Funeral home? 

A If you wish to plan ahead for your future Funeral costs, I believe there are 4 alternatives to consider; Funeral Insurance, Pre-paid Funeral, Funeral Bonds, or self funding.

Funeral Insurance is provided by an Insurance company. You specify the insured amount.  Usually the minimum insured amount is $3000. To commence a policy you usually need to be under 80 years of age.  Cover is generally limited to Accident cover in the first 12 months of the policy.  You pay premiums until you reach a specified age typically 90 and thereafter the cover is provided without cost.  Premiums will vary depending on your age. The premiums will usually increase with age and if you cancel the policy there is no ongoing insurance cover or a refund of premiums. If you hold the policy for a long period of time, the premiums may actually end up costing you more than the benefit to be received so be careful.

Pre-paid Funerals are provided by the Funeral Home directly.  You agree to the arrangements you require, pay the agreed costs in full and enter a contract directly with the Funeral Home. A Pre-paid Funeral may include the Funeral Service, Cremation or Burial Costs, the burial plot, the headstone or plaque and even the wake!  The advantages of a Pre-paid Funeral are that you lock in costs now.  The negatives are that you or your executors usually cannot receive a refund if you change your mind.  You also run a risk if the Funeral home was to fail.

Funeral Bonds are Managed Investments offered by Banks, Friendly Societies and Insurance Companies.  Earnings on the assets of the Bond are taxed within the fund at 30%.  The tax treatment on death will vary depending on when the Bond commenced.  Only the earnings on the fund will be taxable on your death with a 30% tax credit.  The value of the Bond can only be paid to your Estate or to your Funeral Home.  Whilst the Bond is an investment asset, it is not counted by Centrelink for Assets Test purposes up to an initial investment of $12,000.  As a consequence, Funeral Bonds are an attractive option to increase your entitlements to the Age Pension.  Another advantage is that you and your family are not locked in to any one Funeral Home. The disadvantage is that you cannot access the funds once invested, the proceeds must be used towards Funeral costs.

The final alternative is to self fund.  Effectively that means setting aside funds that are readily accessible to your executor to pay for Funeral costs.  Banks will enable access to your accounts by your executor to pay funeral costs.  Your executor will be required to provide an interim death certificate, a copy of your will and the invoice from the Funeral home.  The advantage of self-funding is that you control the capital and you are not locked in to any one provider. You can also invest the funds wherever and however you like.

In all cases, tell your family and your Executor(s) what your plans are. Make sure your will is up to date and valid.  Ensure they know where your will is kept.  Keep any insurance papers, contracts, investments documents with your will in a readily accessible and safe place for when they are needed.

Follow Andrew on Twitter @AndrewHeavenFP.  This article was originally published in The Australian.