Before I dish the dirt on insurance commissions, let’s be clear that what I’m about to tell you does not in any way impact on your need for insurance, only how you go about establishing life and disability insurance. If you are not sure whether you need insurance please refer to last months post.
OK, lets get going. Anyone that has taken out life or disability insurance has probably heard the words “you don’t pay anything directly we receive payment from the life insurance company, its built into the premium” or words to that effect. Details will be disclosed in the voluminous Statement of Advice. Sounds good doesn’t it. Someone else is paying for something you receive. If only that were true.
The reality is that commissions represent approximately 30% (i.e. $30 out of every $100) of the total cost of premiums when full commissions to the agent/adviser are incorporated (it is rare for the full rate not to apply). Further, this relates to the premium paid not only in the first year, but every year.
More accurately, the commission paid by the life insurance company adds approximately 43% to the cost of your insurance premium every year (= $30 / $70), whether you have any interaction with the agent/adviser or not. Doesn’t sound so good any more does it. I’ll say it again just so it’s clear, you pay an additional 43% every year (i.e. $3 for every $7) for your life and disability premiums when a commission is paid to the agent/adviser.
As an adviser the most common reason for clients to consider cancelling life and disability policies is the cost, with the client struggling to see the value for what they are paying. With cost such an issue you would think advisers, insurers and Government would be more concerned.
Disappointingly, the cost of insurance is not getting any commentary in the advisory space, or even in the Government/regulatory space, let alone the public arena. Recent changes are all about how the commissions can be restructured to keep everyone happy (Read insurers/agents and Government), but with no change in the overall amount of commissions or the cost to consumers. Reducing the upfront commissions from greater than 100% to a lower percentage might stop some advisers from churning clients policies (replacing every few years with no real justification), but it won’t impact on the cost of insurance for consumers, as it’s replaced with a greater ongoing commission. The game continues, only with slightly different rules.
In case you are thinking of dealing with the life insurance company directly, to cut out the adviser and commission, good luck. If the insurer doesn’t insist on pushing you into the arms of an adviser they will simply keep the commission component for themselves. It is unlikely you will be any better off.
You can also get insurance from the supermarket these days (as well as a few other unconventional places). Be careful of these options as they can fall into the cheap and nasty category.
There are a small, but growing, number of advisers that for a fixed fee will advise you on appropriate cover and help you establish cover with the commission component removed from premiums. If you can find one you are likely to pay more in the first year but save substantial amounts from then on.
Section 923A of the Corporations Act 2001 prohibits a financial services business from using the words “independent”, “unbiased” or “impartial” if they, or anyone associated with them, receive any commissions or inducements. If you look, you will notice the vast majority of financial planning/insurance businesses do not use these words.
It follows that a business that can use these protected words is more likely to act truly independently when it comes to assisting you with your insurance needs. They should also only charge a fixed fee for doing so.
The lack of noise and action about this matter suggests not many people care that by paying commissions they are unlikely to be getting value for money. Do you?
Aim for Simple, not Simplistic.
This advice is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each person are different and you should seek advice from a financial planner who can consider if any strategies or products mentioned are right for you.