Friendly Society Funeral Policy - serious financial difficulties

Can the Tax Office authorise a friendly society to pay out benefits under a 'funeral policy', as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), before the insured person's death, where a person takes out a funeral policy and later finds themselves in financial difficulties?

No. The Tax Office has no authority to authorise a friendly society to pay out any benefits of a funeral policy before the death of the person insured, even if they later find themselves in financial difficulties after taking out a funeral policy.

A person whose sole source of income is the age pension, takes out a funeral policy to fund their funeral expenses.

The friendly society's benefit fund rules have no provision for payment of benefits under a funeral policy other than on the death of the insured person.

Some years later the insured requires medical treatment and finds they can receive this earlier as a private patient. To fund their treatment they apply to their friendly society for a payout of the benefit under the funeral policy.

The friendly society advises the member that if the proceeds of their policy are to be paid out prior to death this will have to be authorised by the Tax Office.

The definition of 'funeral policy' in subsection 995-1(1) of the ITAA 1997 is a life insurance policy issued by a friendly society for the sole purpose of providing benefits to pay for the funeral of the insured person. [emphasis added]

Amounts derived by friendly societies for funeral policies issued before 1 January 2003 are exempt from taxation, provided the policies have this sole purpose.

To ensure that the sole purpose of these funeral policies is maintained, friendly society funeral policy benefit fund rules usually include the following or similar conditions: (i) entitlement under the policy is occasioned by the death of the insured person; (ii) the policy cannot be surrendered in whole or in part prior to the maturity of the policy; (iii) the policy cannot be charged; (iv) the policy cannot be assigned except to a funeral director under a fixed price funeral contract or other bona fide funeral or burial contract with a funeral director; (v) the amount contributed is reasonably commensurate to defray the expenses of the funeral; (vi) a declaration that if the insured person has effected more than one funeral policy that the total contributions in all such policies do not exceed the amount required to meet the funeral expenses selected by the insured person; (vii) the policy proceeds are used to meet funeral expenses and evidence in the form of receipted accounts should be produced to the friendly society; (viii) funeral expenses include only those amounts of money spent directly in connection with the funeral, burial or cremation of the insured person including:- (a) the cost of acquiring the burial site and digging the grave (the cemetery fee); (b) in the event of the insured person dying at his or her usual place of residence, the cost of transporting the body to the funeral parlour of the funeral director appointed to carry out the funeral; (c) in the event of the insured person dying while away from his or her usual place of residence, the cost of transporting the body back to that residence or to the funeral parlour of the funeral director appointed to carry out the funeral; (d) the cost of transporting the body back to the place or country of origin of the member; (e) the professional service fee charged by the funeral director (f) the funeral director's fee for preparing the body for interment or cremation including embalming; (g) the cost of the coffin or casket; (h) the cost or cremating the body (the crematorium fee); (i) the cost of provision of a hearse and mourning vehicles; (j) the clergy offering; (k) the cost of obtaining statutory certificates; (l) the cost of death notices; (m) the cost of floral wreaths.

Benefit funds of friendly societies are constituted by rules. The rules constitute the terms of the contract between the society and individual policy holders. As entitlement to benefits under a funeral policy is occasioned by the death of the insured person, if benefit fund rules for funeral policies included provision for payment of benefits other than on the death of the insured person, the sole purpose of the policies would be lost.

The Tax Office has no authority to authorise a friendly society to refund the amount invested in a funeral policy before the death of the insured person.