THE DEATH TRAP: From $10 a week to thousands in debt
IN 2000, young Sydney mother Anna* was working full-time while struggling to care for her sick father, four young children and two underage siblings.
Worried about how she would come up with the cash if her father passed away, she decided to take out a $15,000 funeral insurance policy covering her parents, sister and brother.
Five years ago, tragedy struck but not in the way she expected.
"In 2012 my husband passed away and I had to leave my job to care for my four children," she told news.com.au. "In 2013 I became homeless. We lived in a shelter for about three months, we lived in a motel for another two months."
It was from the homeless shelter that she called her insurance company to inform them of her situation, and that she could no longer afford the premiums, which had by this time risen to $200 a fortnight.
"I had no income and I couldn't afford the policy," she said. "I kept getting phone calls to pay the policy or they would terminate. I told them I couldn't afford it. They said to me that if I cancel the policy I lose all my entitlement if I wanted to claim, and I would lose all that I had already paid. They said they could offer me a lower premium, but they would reduce my payout from $15,000 to $4000."
Despite being homeless, unemployed and living on income support, the young mum continued paying her funeral insurance at the lower premium, which the insurance company agreed to reduce from $200 to $91 a fortnight.
"I thought I had an obligation to pay, knowing I had no funds to pay for my father's funeral if it comes up," she said. "He's been ill for so long, I just thought the right thing to do at the time was to continue the policy."
Four years later, Anna is still caring for her father, has remarried and had another three children. While she still has her funeral policy, which she pays for out of her parenting income support payment, it was only after speaking with a solicitor that she realised something was wrong. "The solicitor asked, why am I paying for something I can't afford, and I explained to her the situation," she said.
She is now in the process of negotiating a settlement with the insurer, and hopes she can get back at least some of the money she has paid in premiums over the better part of two decades.
"Now I understand I could have just saved up that money myself," she said. "I just wish they had advised me clearly that as the years go by the premiums go up - and that if I reduce my premiums the benefit would go down."
Anna doesn't want to use her real name, because she doesn't want to jeopardise the settlement. The irony of funeral insurance is that most insurers will settle cases when customers realise they've been taken for a ride and seek legal assistance - but those settlements are invariably confidential.
"We see people pay tens of thousands of dollars over the years," said Jemima McCaughan, senior solicitor with Legal Aid NSW. "Sometimes people can pay over $100,000. I've seen people pay up to $40,000 or $50,000 in funeral insurance, over a long period of time."
As premiums rise, many people "end up stuck between a rock and a hard place", struggling to make ever-increasing payments but not wanting to cancel their policy for fear of losing the benefit - and all of money they have already paid, often far in excess of the actual benefit.
"The way the funeral insurance industry works is there are very few health checks and things, so the premiums are quite high and they continue to rise," Ms McCaughan said. "So it's very easy if you start on $20 a fortnight, over a couple of years that could be $60 or $70 a fortnight. If you signed up when you're 30 or 40, and still alive at 80, that's a lot of money."
Ms McCaughan said funeral insurers typically targeted the same low-income demographic as controversial "rent-to-buy" schemes. "It's definitely the same market," she said. "The people we see with contracts for renting household goods are often the same people we see with a funeral insurance contract.
"We see people sign up young, particularly in Aboriginal communities. More than any other community they are really looking for ways to pay for funerals, because people have larger kinship networks, there is severe disadvantage and people are dying young, so people are more regularly called upon to contribute to funerals."
She said while there had been some changes in the market following public pressure over the last four years, there were still fundamental problems with the sector.
"There are issues around the way those products are marketed and sold, particularly when we know a lot of consumers signing up to funeral insurance are vulnerable. They can't come up with $6000 or $7000 at the drop of a hat for a funeral."
But Ms McCaughan said "the nub of the problem" was that "insurance is not the right response to this need". "Bonds, prepaid funerals or high-interest savings accounts, those options are not necessarily presented to people," she said.
"The insurance industry has really preyed on the idea that people don't want to be a burden on their families, they want to plan ahead. People don't always make rational decisions in relation to financial products, people respond to the marketing."
A report into the funeral insurance industry by the Australian Securities and Investments Commission in 2015 found a high rate of cancellations and steep increases in premiums.
The average premium for 80- to 84-year-olds was four times the average premium for 50- to 54-year-olds, as most consumers held "stepped" premiums which increase with age. ASIC found even so-called "fixed" premiums often increase by about 5 per cent annually under so-called "inflation protection" measures.
The nine insurers covered by the report received nearly $315 million in premiums for the 2014 financial year, up 9 per cent on the previous year.
ASIC's report found that in 2014, a total of 72,091 funeral insurance policies were cancelled, representing a lapse rate of 16.5 per cent of total active policies. The rate of cancellations as a proportion of new policies was 80 per cent.
Nearly two thirds of cancellations were initiated by consumers, with the main reason being cost.
About 55 per cent of cancellations occurred during the first year of the policy, nearly two thirds of active policies had been held for less than three years, only 17.5 per cent had been held for more than five years, and just 4.7 per cent for longer than eight years.
"The high rate of cancellations points to problems not only with cost, but the design, marketing and sales of funeral insurance," ASIC deputy chair Peter Kell said at the time. "It appears that many consumers do not understand important features of the product until after they have signed up."
The report also found that while more than half of consumer insurance customers were aged 50-74, indigenous consumers tended to be much younger, with half aged under 20.
The report's key recommendations included that insurers "clearly and prominently disclose" the risk to consumers if the total amount of premiums payable has the potential to exceed the benefit amount.
Under the Financial Services Council's revised Code of Practice which came into effect on July 1, insurers pledge to provide customers with a "key facts sheet" that explains "whether the premium structure is level or stepped and an illustration of the impact of this structure on your future payments", and "whether the total amount of premiums payable under the policy has the potential to exceed the benefit amount".
But the policy only relates to disclosure, and not the actual design of the products.
In 2015, ASIC pointed out that its recommendations were made "in the context of ASIC's current powers". The Turnbull government is pushing ahead with new laws giving ASIC "product intervention powers", which would allow it to temporarily ban financial products that are likely to lead to poor consumer outcomes.
ASIC Chairman Greg Medcraft has described the powers as potentially a "game changer". The government is currently consulting with industry about the change, which was announced as part of its response to David Murray's Financial System Inquiry.
"ASIC would be able to intervene when they see products being targeted at particular groups of people, or not taking into account the needs of consumers," Ms McCaughan said. "That would be a great step forward."
In a statement, FSC Sally Loane said a number of ASIC's recommendations from 2015 had been incorporated into the new Code of Practice.
"These included providing upfront, plain English information about how the customer's premiums will be structured, explaining whether the total amount of premiums payable under the policy has the potential to exceed the benefit amount and providing additional information to help customers understand the key features of the product," she said.
"The independent Life Code Compliance Committee, which is administered by the Financial Ombudsman Service, is responsible for ensuring our members and those who have signed up to our Code of Practice comply with these standards.
"The FSC is currently drafting the second iteration of the Life Insurance Code of Practice which will look to build on the consumer protections and commitments to standards of service already in place.
"Some prepaid funeral plans are issued by funeral directors and associated businesses which are not FSC members. We strongly encourage these businesses to sign up to the Code on a voluntary basis. ASIC said in its 2015 report that it is encouraged by the steps the industry has taken in response to increased scrutiny on funeral insurance products."