The future of commissions on risk insurance in super

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Hoorah!!  A moment of lucidity prevails.  The Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten has indicated that the Government may reconsider its original FoFA proposal to ban commissions on life insurance sold within superannuation.  This ban was originally due to come into force on 1 July 2013.

Shorten says he has been “listening very carefully, and while this is not a definitive statement finally, I am a little more persuaded of the case around risk insurance and the commission where there’s a bit of work actually gone into delivering a product to an individual”.

I do not see the case for commission on insurance through default or group policies, but I’ve certainly been open and listening carefully to the propositions put around individually-advised risk products in super,” Shorten says.

Risk insurance has always required a lot of explaining in the right context as well as some persuasive argument on the part of an adviser.  These are not products that sell themselves or disappear off the shelves in a buying frenzy.  This is evidenced by the fact that the majority of the Australian population has no personal insurance and those who do are significantly underinsured.

Clients fall over themselves to sign up to wealth building products but it’s a different story when it comes to wealth protection.  Expect to hear the “she’ll be right mate” as a first response to a proposal for wealth protection in the form of risk insurance.  The average Aussie doesn’t hesitate to insure the beloved car but considers life insurance to be a waste of premiums.

This attitude prevails regardless of the form of remuneration.  Everyone dreams of building wealth but no one wants to consider their own premature mortality or morbidity.  The population is generally resistant to the concept of risk insurance.

Those who do sign up for life insurance in super often choose commissions to avoid writing a cheque.  It is not an issue of commission vs. fees.  It is the very practical matter of cash flow.

Clients would rather use money that they can’t touch for years than use their already stretched household budget.  To have commissions paid out of their super fund is one way to gain early access to their superannuation to pay a bill.  It is merely a bonus that there is a tax advantage as well.

If clients are forced to pay fees for their insurance, they are more likely to refuse or reduce an adviser’s risk insurance recommendation simply on the basis of affordability.  That is, no money available after the rising costs of the mortgage, home insurance, food, petrol, electricity, water and a plethora of other living expenses.

Furthermore, it is unlikely that clients will pay ongoing fees all the way through to claim time.  But if the adviser is not paid, he or she is unlikely to be there to help.  Whilst it can be argued that the commission remuneration model doesn’t reflect the true value of advice, it does ensure that the servicing adviser is there when needed at claim time.  The importance of this cannot be underestimated.  Only those who have suffered the tragedy of a death in the family or a life threatening health event can understand the immense value of a helpful and empathetic adviser.

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