Funeral bonds explained: Covering future expenses

Funerals are one of life’s inevitable costs, yet many people avoid thinking about how they will be paid for. Planning ahead can spare loved ones from financial strain and provide peace of mind. One option that deserves consideration is a funeral bond, which allows you to set aside money in advance in a structured way.

Unlike funeral insurance, which involves paying ongoing premiums, funeral bonds work more like an investment that steadily grows until it is needed. They can offer flexibility, potential tax advantages and, in some cases, favourable treatment from Centrelink.

What a funeral bond is

A funeral bond is an investment product specifically designed to cover funeral expenses. It is generally offered by friendly societies, life insurance companies and some funeral directors. A friendly society is a member-based mutual organisation that provides financial services, often with a focus on community benefit.

When you purchase a bond, your money is pooled into a managed fund. The funds can only be accessed after you pass away, at which point the proceeds are paid to your estate or directly to your nominated funeral provider. Until then, the balance earns interest like other managed investments.

How Centrelink treats funeral bonds

For anyone receiving or planning to apply for the age pension, Centrelink’s rules are important. Funeral bonds are normally counted under the assets test. That means your share of the investment, plus any earnings, is included in your assessable assets and deemed to generate income.

However, there is an exemption. If the total value of your funeral bonds does not exceed the Funeral Bond Allowable Limit (FBAL) and you do not have a prepaid funeral arrangement in place, the bond can be disregarded under the assets test. The FBAL is indexed annually on 1 July and is currently $15,750. You can hold more than one bond, but the combined total across them must stay below this limit for the exemption to apply.

To illustrate: if you have one funeral bond worth $12,000 and another worth $3,000, both may be exempt from the assets test provided you have no prepaid funeral contract. If instead you have $20,000 across bonds, only the first $15,750 is exempt and the remainder is assessed.

It is essential to tell Centrelink about any funeral bonds, even if they are exempt, so your records remain accurate.

Benefits and conditions of funeral bonds

One of the main advantages of a funeral bond is that the proceeds are paid out tax-free. This ensures the funds are available in full when required, without reducing the benefit through tax at the time of payment.

Funeral bonds also give families flexibility. The money can generally be used with any funeral director, meaning your loved ones are not locked into a particular provider. Some bonds offer additional features such as covering the cost of transporting the deceased back to their home town or interstate, which can be valuable for those living away from family or who travel frequently.

It is important to note that conditions differ between providers. Some bonds pay out the full balance regardless of the actual funeral cost, while others only release the amount required for expenses. In many cases, any surplus after the funeral is returned to the estate. Reading the product terms carefully will help avoid surprises later.

Things to consider before investing

While funeral bonds can be a practical solution, they are not suitable for everyone. The money cannot be accessed during your lifetime, so you should be confident you can set it aside without affecting other financial goals.

It is also worth weighing them against alternatives. A prepaid funeral, for instance, involves paying a funeral director upfront for a specified service at today’s prices. This locks in arrangements but reduces flexibility. Funeral insurance spreads the cost over time but generally becomes more expensive in the long run, as premiums may continue indefinitely.

Each approach has strengths and drawbacks. Choosing the right one depends on your circumstances, your pension eligibility, and how much flexibility you want your family to have in the future.

A tool best used with guidance

Funeral bonds sit at the intersection of financial planning, estate management and aged care considerations. Each of these strategies can be valuable, but they can also be complex to implement. Seeking personal financial advice will help ensure the option you choose fits comfortably within your overall plan.

A practical way to prepare

By setting aside money in a funeral bond, you can ensure that funds are available when needed, ease the administrative burden on family members and potentially gain Centrelink advantages. While it may not be the most comfortable subject to consider, preparing in advance can be an act of care and foresight.

If you would like to discuss how this applies to you, please reach out to our friendly team at Stream Financial.