Life Insurance Changes - what they mean for you

(Updated July 25, 2016)

Due the federal election the planned changes to the commissions around life insurance (discussed below), and due to begin on July 1 2016, were delayed.

But the government says it will push ahead with the reforms and the crackdown on commissions in this parliament.

In all the hullabaloo about the election some significant changes to the way life insurance is sold and regulated have been overlooked.

And given both the galloping costs of premiums in recent years and the high levels of under-insurance (not enough cover) or no insurance at all the reforms should help consumers.

While commissions paid financial planners for selling various financial products have been outlawed by legislation  those selling life insurance were not affected.

It was time to act. In late 2014 a damning report from ASIC, the securities and investments commission,  found commissions up to of 130% of the premium were being paid for the first year alone

Not only were consumers paying through their premiums to incentivise the person who sold them insurance on the first place they were also not being clearly told about the arrangements.

What’s even more galling was that the same 2013 ASIC report found that those who paid the highest commissions tended to get the poorest advice!

However from July 1 the crackdown on them has finally begun with a joint government, regulator and industry package of changes stretching over three years.

In future the maximum upfront commission cap will be 60% of the first year premium with a 20% cap on the ongoing, or trailing, commission for subsequent years.

The reduction will be phased in over time with a max 80% commission now in operation, falling to 70% from July 2017 and the final 60% cap by July 2018.

Another reform to prevent insurance salespeople ‘churning’, or moving their clients from one policy to another to pocket the maximum upfront commissions, will be new ‘claw back’ provisions.

If a consumer drops a policy within the first three years the insurance companies can get back, or claw back, some of the commission paid.

It’s a start of fixing a system which seemed to benefit the sellers of life insurance far more than those who consumed and hence paid for it.

It’s often said life insurance is a product which has to be sold given its complexity and the work advisers and others sometimes go into the find the best policy for the consumer.

This work does come at a cost but at 130% of the first year premium?

As stated the government and others will do their work in implementing and regulating the changes now it’s up to us consumers to see how we can help make this important market work more in our interests.