Tag Archives: Life Insurance

News

Life Insurance Commissions

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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;

  1. “Commissions are paid by all insurers so it does not create a Bias or Ethical dilemma” or
  2. “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)

Estate Planning

Life Insurance and Estate Planning when you are Divorced

Warning: This content has been prepared without taking account of your personal objectives, financial situation or needs. Before you make any decision regarding any information, strategies or products mentioned in this newsletter, consider whether it is appropriate to your own objectives, financial situation and needs.

Setting up your Estate Plan when you have divorced is very important, in this article I will look at a common situation.

(this is a made up example): Bob has one child Kim from his first marriage to Cathy. He has now married Sharon and they have a new child Paul.

Sharon and Bob have a house with a mortgage; Bob also has super of 200k.

Bob wants to make sure if something was to happen to him that Sharon and Paul would be provided for as Paul is only 2 and Sharon is not working at the moment; but he also wants to make sure that Kim is provided for and that Cathy can not claim any part of his estate.

Presuming the house they have bought is in Joint Names then if Bob was to die this house will not form part of his estate; it will transfer over to Sharon. Because it is not part of his estate no one can attempt to claim part of it (for example Kim or Cathy). But this also means that Bob cannot leave part of the home to Kim if he wanted to.

With Bob’s super he has two choices he can do nothing in which case his super may be paid to his current wife Sharon or be paid out to his estate (the Super Fund trustee would decide the most appropriate treatment) this could also be open to dispute. Or he can make a binding nomination; in this case Bob’s super payment will be paid to the person or people that Bob nominates. As long as the Binding Nomination is correctly executed this nomination is not open to dispute after Bob dies.

From a tax Point of view payment of a death benefit from super to a “super dependant” such as a current spouse or under 18 child will be tax free.

Essentially Bob has 3 people he potentially wants and needs to provide for; His Daughter Kim, current wife Sharon and their Son Paul. As long as Bob trusts Sharon to look after Paul he can provide financially to Sharon only as Paul is still too young to look after his own finances. While potentially you can have one life insurance policy that provides for all three people (or more) or you can also make a super nomination nominating three people. To minimise the possibility of dispute and make things very clear I would recommend that Bob takes out a life insurance policy outside of super to specifically provide for Kim. Depending on Kim’s age he may want to allow for a testamentary trust to preserve the proceeds from the life insurance for Kim until she is old enough to look after the funds herself.

To provide for Sharon and Paul Bob can leave his super via a binding death benefit nomination. This reduces the ability for Cathy to dispute his will on behalf of Kim. If Bob wants to provide more than the $200,000 super balance, then he can take out a second life insurance policy. This could be held by his super fund (and so paid out in line with the binding death benefit nomination) or outside with the policy owned by Sharon.