Alan Maddick, March 2022
Traditionally when Financial Advisers recommend and advise on Life Insurances like Income Protection, Trauma or Life Insurance they receive a commission from the Life Insurance company; both initially on placement of the Insurance as well as on an ongoing basis.
Financial Advisers will say a couple of common things;
- “Commissions are paid by all insurers so it does not create a Bias or Ethical dilemma” or
- “The commission are paid from the insurer so there is no cost to you”
Lets have a look at number 1 – the commissions on insurance are generous and do create issues in the advice given by advisers, so much so that the Government has taken action to reduce the amount of commission payable reducing it down from 110% of the year 1 premium to now 60% of the year one premium. You can read more about this here on the ASIC site: Life Insurance Framework
For example a $1000 insurance premium will pay a $600 commission, if an adviser encourages you to take out more insurance lets say a $3000 policy now they are getting paid $1800 instead of $600. This creates a bias and business model where advisers will be rewarded for selling as much insurance as possible. If you need more insurance this is great news but if those extra funds could instead have been paid off your home loan or contributed to super then it is not so great for your long term financial position.
Next the commissions that are paid from insurers are paid from the premiums you pay! So the cost of the commissions do increase the cost of insurance. In fact this is so clear that as an adviser I can elect not to take a commission with most insurers. By doing this the Insurance Premium will be reduced by around 25%,* going back to the $3000 per year insurance example above by me not taking a commission that would reduce your premium to $2250 per year, a saving of $750. Imagine you keep the insurance for 15 years, you would save $11,250 or more.
As an adviser there is an issue with not getting paid for my work via commissions and that is I still need to get paid for my work advising you. Without commissions paying me you will need to pay for advice; while this is an out of pocket cost you can see it can save you a substantial amount. If that does not suit you I am happy to discuss receiving some commissions to cover part or all of the cost of advice.
* (some variation in the discount between insurers and policy types)