Life insurance bought through an adviser has a greater chance of success at claims time. Photo: FairfaxWhile commissions are being phased out on most of the financial advice industry, they live on when it comes to life insurance.
Unlike with commissions on other financial products that are paid by the consumer, life insurance commissions are paid by the insurers.
However, with up-front commissions of about 120 per cent of the first year’s premium, there’s an incentive for advisers to switch or “churn” their clients to another policy to trigger another up-front commission.
The government has a bill before parliament that will cap upfront commissions to 60 per cent of the first year premium.
Advisers are paid about 10 per cent of the annual premium by insurers as ongoing commissions. The bill doubles the maximum allowable ongoing commission to 20 per cent.
Under the “clawback” provision of the bill if the adviser switches a client to another policy within one year, the adviser will have to re-pay all of the up-front commission to the insurer of the first policy.
If the switch occurs between 12 months and two years, the adviser repays 60 per cent of the up-front commission.
Life insurance, which includes death and disability cover, is among the most complex of insurances with widely differing definitions of what constitutes disability, diseases and conditions, for example.
Buying insurance through an adviser can often be cheaper than buying direct from the insurer with more chance of the claim going through.
In its latest review of life insurance, the Australian Securities and Investments Commission found higher levels of denial of claims for those policies sold direct to consumers with no financial advice, compared with policies sold through advisers and “group” insurance policies, such as through super funds.
It’s likely that a policy recommended through an adviser is better tailored to the needs of the consumer. And a good adviser will help with the claims process.
But there is something else. Policies bought through advisers are underwritten by the insurer at the time that the policy is accepted.
With most policies bought directly from insurers, the checking of disclosures is done at the time of the claim.
That can mean a higher chance of someone paying premiums for years thinking that they are covered only have their beneficiary’s claim denied.
Many super funds offer automatic acceptance without the need to provide medical history or undergo a medical exam.
Some funds with automatic acceptance now require that pre-existing medical conditions be disclosed and, as long as they are disclosed, cover should not be affected.
This bill and the other reforms that make-up the Life Insurance Framework will help better protect consumers.
They should be passed by parliament so that the new rules are not delayed beyond the scheduled start date of 2018.
This story Administrator ready to work first appeared on Nanjing Night Net.