Funeral Insurance and Consumer Harm: Recent Reforms in Australia

In 2019, more than 700,000 Australians held a funeral insurance policy. Funeral insurance offers a cash benefit, usually between $5,000 and $15,000, to the policyholder’s beneficiaries to cover the costs associated with a funeral. Providers market these products as offering ‘peace of mind’ for family members ‘during a difficult time’, promising that claims are processed quickly, in as little as ‘one business day’. The product appeals to lower income earners who wish to provide for their own funerals and avoid leaving their loved ones with the ‘burden’ of significant costs. These providers play upon consumers’ perception that funeral costs are increasing dramatically, a perception fuelled by a lack of transparency in the market. Yet these products are an expensive way of paying for a funeral, exposing consumers to the risk of substantial financial loss. Under some policies, it is possible for consumers to pay more in premiums than their beneficiaries will receive in benefits, a risk that is particularly acute for younger consumers who are likely to pay premiums over a longer period. All policyholders are at risk of losing their cover, and the value of all premiums paid, if their policies lapse or are cancelled due to non-payment. This is a common experience: research conducted by the Australian Securities and Investments Commission (‘ASIC’) in 2014 found that 80 per cent of all new policies were cancelled within a year.

Aboriginal and Torres Strait Islander people have been disproportionately affected by financial losses of this kind. This is largely due to the activities of a single company, which since at least 1993 has marketed a range of products purporting to be designed specifically for Aboriginal people. This company came under significant scrutiny in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘Royal Commission’), which handed down its final report in 2019. The Royal Commission found that the company had deliberately targeted consumers in remote Aboriginal communities, selling policies of little value to entire families, including small children. In response to the Royal Commission’s findings, the Australian Government has enacted a series of reforms designed to afford greater protection to consumers of funeral insurance and to curb misleading, deceptive and unconscionable conduct in the industry.

Our article is the first academic study of funeral insurance to be published in Australia. It provides an overview of the funeral insurance industry; describes the regulation of funeral insurance; outlines the key features of mainstream funeral insurance products and identifies the main risks posed to consumers by these products. The article outlines the findings of the Royal Commission in relation to policies marketed specifically to Aboriginal people. These policies, known as ‘funeral expenses’ policies, were at the time of the Royal Commission outside the regulatory framework applicable to mainstream funeral products.  For this reason, they posed a high risk of financial loss, especially when sold to children and young adults.  The Royal Commission found that the company selling these products presented itself as being owned and managed by Aboriginal people, despite the fact that, until 2018, it did not have any Aboriginal shareholders or directors.  It found that the company’s marketing strategies were misleading, deceptive and at times ‘predatory’.  It also heard evidence that many of the company’s customers had paid more in premiums than their survivors could ever receive as a benefit, under the terms of their policies.  In evidence before the Royal Commission, the company revealed that it had cancelled the policies of more than 22,000 consumers between 2004 and 2019, typically due to non-payment of premiums.  Some of these consumers had paid substantial premiums over several years, but lost their cover completely after their policies were cancelled.

Our article outlines the recommendations made by the Royal Commission, and implemented by the Australian Government, with a view to improving the value of funeral insurance and addressing the harmful practices of companies marketing poor quality ‘funeral expenses’ policies in remote communities.  It evaluates these recent reforms and considers the need for further measures, both to address the risks inherent in all funeral insurance products and to provide redress for the harmful practices of these companies.  It concludes that while the Government’s recent reforms have merit, they fail to address fundamental questions regarding the quality of funeral insurance products and the value for money they offer.  In particular, they fail to adequately address requirements for disclosure of the risk that consumers will spend more in premiums, over the life of a policy, than their survivors can receive in benefits.  The article suggests that ASIC should use its licensing and enforcement powers to ensure that all consumers are adequately warned about this risk, prior to purchasing a policy. The Commonwealth Government should also consider ways to increase transparency in the market, requiring greater disclosure of pricing and other information by funeral insurers and providers of funeral services.  With regard to ‘funeral expenses’ policies, the article contends that the Government should include such policies in its proposed Compensation Scheme of Last Resort for consumers of financial services.  It also argues that the Government should take positive steps to support the development of not-for-profit funeral services, in consultation with communities most affected by past misconduct in the industry.  This would reduce the risk posed by low quality products and would help to meet consumers’ genuine need for affordable and accessible funeral insurance.

Lucinda O’Brien is a Research Fellow in the Centre for Corporate Law, University of Melbourne

Peng Guo is Lecturer in Law at the Graduate School of Business and Law, Royal Melbourne Institute of Technology

Ian Ramsay is Redmond Barry Distinguished Professor Emeritus in Law, University of Melbourne

Paul Ali is Associate Professor in Law, University of Melbourne