Life Insurance vs Funeral Insurance: What's the Difference in 2025?

Australians are often bombarded with ads for both life insurance and funeral insurance, but the two products serve very different purposes. Understanding the distinction can save you money and ensure you have the right protection for your needs in 2025.

What Is Life Insurance?

Life insurance pays a lump sum to your beneficiaries when you die. It’s designed to replace your income, pay off debts, and provide long-term financial security for your family.

• Cover amounts: Typically $100,000 to several million dollars.
• Purpose: Income replacement, mortgage protection, debt clearance, education funding.
• Underwriting: Usually requires health questions and sometimes medical exams.
• Premiums: Based on age, health, occupation, and cover amount. Generally cost-effective for the level of cover provided.
• Policy term: Often to age 65, 70, or for a fixed number of years.

What Is Funeral Insurance?

Funeral insurance (also called funeral cover or funeral benefit insurance) pays a smaller lump sum specifically intended to cover funeral and burial costs.

• Cover amounts: Typically $5,000 to $15,000.
• Purpose: Covering funeral expenses so your family isn’t burdened with costs at a difficult time.
• Underwriting: Often “guaranteed acceptance” with no health questions, but may have waiting periods.
• Premiums: Fixed or age-based. Can become expensive over time, especially for older Australians.
• Policy term: Usually whole-of-life (no set end date).

Key Differences at a Glance

The Hidden Cost of Funeral Insurance

Funeral insurance is often marketed to older Australians with the promise of “no medical questions” and “guaranteed acceptance.” However, ASIC has repeatedly warned that these products can deliver poor value:

• Total premiums may exceed payout: If you pay premiums for many years, the total paid can exceed the benefit amount.
• Waiting periods: Many policies won’t pay out if you die within the first 1–2 years (except in cases of accidental death).
• Premium increases: Some policies increase premiums as you age, making them unaffordable in later years.
• No cash value: If you cancel or can’t afford premiums, you lose everything you’ve paid.

2025 Regulatory Updates

In response to concerns about funeral insurance, ASIC has introduced stricter disclosure requirements in 2025:

• Clearer cost comparisons: Insurers must show how much you’ll pay in premiums over time versus the payout.
• Cooling-off periods: Extended cooling-off periods allow consumers to cancel within 30 days.
• Advertising restrictions: Insurers cannot market funeral cover as a substitute for comprehensive life insurance.

Which Should You Choose?

• Life insurance is the better choice if you need significant financial protection for your family—covering debts, income replacement, and long-term security.

• Funeral insurance may be suitable if you’re older, have no dependents, and simply want to ensure your funeral costs are covered without burdening family. However, consider alternatives like a dedicated savings account (a “funeral fund”) or prepaid funeral plans, which may offer better value.

Real-World Example

Maria, 68, was paying $80/month for funeral insurance with a $10,000 payout. After five years, she’d paid $4,800 and still had years of premiums ahead. A financial adviser suggested she cancel the policy and redirect the $80/month into a high-interest savings account. Within three years, she’d saved more than the funeral policy would have paid—and the money was hers to use however she wished.

The Bottom Line

Don’t let marketing confuse you. Life insurance and funeral insurance are different products for different needs. For most Australians, comprehensive life insurance—or simply saving for funeral costs—offers far better value than standalone funeral cover.