Are life insurance commissions fuelling Self-Interest or Best Interest?

From

Brett Wright

A recent report released by life insurance specialist Brett Wright, has shed some light on the life insurance commission debate, from an advice practitioner and consumer point of view.

The government, regulators and opposition have continued with their narrative of supporting a ban of life insurance commissions (or potential ban pending an ASIC review). For those at the coalface of the life insurance and advice industries, we know a ban on commissions would spell disaster; but when the industry fights back or disagrees with this ideological “ban commissions” approach, it can be seen by its detractors, as looking like the industry is simply trying to serve its own interests and not the best interests of policyholders and the wider community.

Are commissions in the best interest of clients? When it comes consumer best interest in advised life insurance and the payment of commissions, the main factors to consider are:

  • Can the consumer access policies and advice without cost barriers?
  • Do consumers have the ability to review their cover at any time, without fear of additional costs on top of their premiums?
  • Is cover fit for purpose and with the help of their adviser, will the consumer have the best chance of a successful claim without confusion, anxiety, financial risk and financial distress?
  • Is the consumer in a better position compared with outcomes of trying to DIY?

In my experience, the answer is yes to each of the above points for consumers who arrange their life insurance with the help of their adviser under a commission model.

Do consumers believe the life insurance commission system is broken? 70% of new policies are originated by Advisers and only 0.2% of complaints that make it to decision with AFCA are against financial advisers. Based on these stats, consumer research and the sheer number of consumers choosing commission as a way of funding advice, reviews and claims services from their adviser, the sensible would argue, consumers do not believe the life insurance commission system is broken and they are happy with it.

Where have we gone wrong? There are many issues, but one of the main issues, is the government and regulators trying to fit life insurance advice (square peg), into the same framework as investment/retirement advice (round hole). What I mean by this, is it is a mistake to design regulations assuming life insurance advice and investment/retirement advice are fundamentally the same, when clearly they are not, and it is a mistake to assume the typical life insurance client’s needs, wants and capacity to pay for advice are the same as the typical investment/retirement client’s needs, wants and capacity to pay for advice, when they are not.

The regulatory environment has created a disconnect, where life insurance advice/products are relying on cross subsidy/promotion with investment advice/products, which is ok for some – but for the large majority of consumers, the need for life insurance advice and the need for investment/retirement advice could not be further apart, so why are we trying to bundle them together?

For most, life and disability insurance is very much needed when we are financially vulnerable and in many circumstances unable to pay for quality advice and guidance i.e. mortgaged to our eyeballs, young kids, starting a business and expenses are at an all-time high; which is why the added barriers of Fee for Service on top of premiums cause people not to act and go un-insured or significantly under-insured when trying to DIY.

Investment advice is usually wanted and needed when we are more financially secure, have an asset base, are planning for retirement and have the financial capacity to cover the costs of seeking out a professional adviser to help manage our money and plan for the future; which is why the investment/retirement Fee for Service model works for most.

There is room for Fee for Service (FFS) in life insurance advice and the consumers who want and/or can afford FFS, can access this option already. But FFS should not be the only option and it is essential consumers maintain their right to choose between the commission and FFS models, and decide which is best for them when funding their life insurance advice and ongoing services.

Read the report

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Wright’s report has been supported by key industry leaders such as John de Zwart CEO NEOS Life, Michael Pillemer CEO PPS Mutual, Wayne Handley MD Bombora Advice, Helen Blackford CEO Lonsdale, Millennium3 & IOOF Alliances, Don Trapnell Director Synchron, Nettie Handley Life Insurance Advice Advocate and Ben Donald Adviser and Director Austbrokers Financial Solutions.

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