Early pioneers of financial advice were essentially door to door salesmen. Working for the big life companies and pounding the pavement, their wages were based on the number of policies sold.
In some sections of the advice community, this style of remuneration is still very entrenched. Even though a Statement of Advice document has to be prepared for compliance, clients are still offered free or very low cost life insurance advice. The adviser then relies on commission from the insurer to cover costs and make a living.
It has been a very viable business model. Up until the end of 2017, it was possible to receive in excess of the first year’s premium as a lump sum for arranging a new life insurance policy. In addition, the adviser may also receive a monthly commission payment while the policy is in force.
However, not all life insurance providers make payments available to advisers. Commissions are mostly paid by what are known as “Retail” insurers who view advisers as a sales channel for their products. Most industry super funds will not make insurance commission payments.
Commissions are conflicted
Research has shown that commission incentives are likely to result in people being recommended to change policies when it may not be in their best interests. It is worth noting that those who are older and carrying more risks are subject to the highest premiums and therefore can generate the most in commission. They are also the same group that carry the most risk of being rejected at claim time by their new insurers (due to non-disclosure or other issues).
Within the last few years, regulation has started to catch up. The maximum amount of commission that can be paid has already been reduced to 80% of the year 1 premium upfront and 20% ongoing. It is scheduled to be further reduced next year.
What can I do?
If you are looking for retail life insurance, what can you do? Well, if you take up the offer of a free service, just be aware that someone somewhere is probably being paid a commission (even if you purchase on-line). If the advice is low cost, it may be that your adviser is “double-dipping” and receiving your payment and a commission payment from the insurer. You are unlikely to be recommended any product from an industry fund.
There are a small (but growing) number of financial planners who offer no-commission insurance in exchange for an up-front arrangement fee and on-going review fee. The advantages to you are that:
- your requirements can be assessed without the adviser needing to maximise your cover amounts,
- existing policies can be reviewed free of conflict of interest,
- recommendations do not have to take into account how the adviser is to be paid and
- you are entitled to receive a regular review service in exchange for the on-going fee (this is not the case for on-going commission under current rules).
The bonus is that some commission-free policies can have a premium between 24 and 28% less than the same policy with in-built commission. For some clients who are putting comprehensive covers in place it can take a very short time for them to be financially better off on the deal.
If you are interested in learning more about no-commission insurance or would like a review of your current arrangements, please be in touch.
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© Summation Strategies 2018.
Please note that all information provided is of a general nature and does not take into account your current financial situation, needs or objectives. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. We recommend those seeking insurance or making an investment obtain financial advice specific to their situation and consider the Product Disclosure Statement prior to making any financial investment or insurance decision.