Life insurance commissions – perception versus reality

SYDNEY: 10 July, 2015 – Life insurers are allowing a misperception that advisers are being paid upfront commissions of up to 120% to continue, according to Life Insurance Direct.

“Their intent might be unclear but the effect is not,” says Life Insurance Direct CEO, Russell Cain. “This view of adviser remuneration is popularly accepted but, in our experience, it is fundamentally untrue.”

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For the past few years, the Life Insurance Direct team has been tracking applications, policy transactions and commission payments received. The resulting data, entirely based on their experience, (approximately 3000 policies across 10 life insurers) provides an interesting case study. It reveals that the average annualized premium was around $1494. It also reveals the following interesting findings around what the life insurers actually paid in terms of commission:

  • The “120%” paid by life insurers includes GST (10%) which is paid to the ATO and
    not the adviser
  • Life insurers generally don’t pay commissions on frequency loadings (6-9%),
    policy fees ($5.61 – $8.82 / month) or stamp duty (0-10%) but these are included
    in the mythical “120%” cited by these companies. Excluding these elements
    means the average commission received for the policy implementation is closer to 89.83%

“We analysed the data breaking down what insurers actually paid,” Mr Cain says. “This data therefore gives an indication of what the proposed changes to adviser commissions are likely to mean in real terms and who will really benefit or suffer from the proposed
changes.”

Mr Cain said this prompts questions around how much consumers should be paying for life insurance.

“When it comes to life insurance, it’s not necessarily a case of you get what you pay for,” he says. “Life Insurance Direct also conducted research into over 20 life insurance offers that shows that cheaper policies can often offer better value than more expensive policies.
Generally speaking, life insurance policies sold direct to the public by big brands are usually more expensive and less comprehensive than those offered via financial advisers.”

To help consumers to make better-informed choices about insurance, Life Insurance Direct created the Life Insurance Direct Quote Index that allows Australians to directly compare the cost of various types of life insurance policies.

Users enter some key details (such as their gender and the level of life insurance cover required) and the Index models the data to show, and compare, the cost of the various options. Using an example of a 50-year-old male wanting $500,000 of life insurance, Life Insurance Direct found that annual premiums could vary by as much as $1,600 per year.

“In the past, life insurers have competed fiercely for business from financial advisers,” Mr Cain says. “This competition led to more comprehensive and better priced policies for consumers. The Quote Index highlights that the dynamic doesn’t operate in the direct insurance market.

“Reforms that ultimately reduce competition may have a significant negative impact on consumers,” Mr Cain says. “Unfortunately, the empirical data and intuitive tools available from lifeinsurancedirect.com.au, indicate that the interests of consumers may not be served at all well by the reforms.”

Author: Russell Cain
Published: July 10, 2015

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