In line with current legislation, advisers are legally allowed to charge a commission on insurance-based advice.
So, the question is then posed, how much of your money is being spent in commissions on your insurance premiums?
What is Personal Insurance?
To begin with, understanding what personal insurance is and what it includes is highly important in contextualising why commissions are charged.
In summary, personal insurance is aimed towards assisting people and their loved ones in the case of an unexpected emergency.
There are different products that are covered by the term ‘personal insurance’ and are designed to help you on different occasions. These include:
- Life Cover Insurance – refers to a lump sum that can be claimed in the event of your death.
- Trauma Insurance – refers to a lump sum that can be claimed if you experience a serious injury or suffer a critical illness.
- Total and Permanent Disability (TPD) insurance – refers to a lump sum that can be claimed to assist you with living and rehabilitation expenses in the occurrence that you become permanently disabled to an accident or illness.
- Income Protection (IP) insurance – Refers to monthly payments that can be claimed if you become sick or injured and are unable to work. Generally, it covers 75% of your existing salary but can differ depending on the cover that you select.
Corporations Amendment Act 2017
In accordance with the Corporations Amendment (Life Insurance Remuneration Arrangements) Act 2017, advisers are able to charge commissions in return for the sale of life insurance to their clients.
However, as of 1 January 2018, the Life Insurance Commissions Instrument have implemented a limit on the commissions that advisers are able to charge on Insurance premiums. In doing so, they are hoping to reduce reasons for advisers to provide unsuitable advice to their clients for financial gain. Setting these commission caps and clawback amounts in practice requires advisers to repay the funds gained by commission amounts to the client if the policy is cancelled within the first two years.
Case Study
For example, consider a couple with the same age and occupation, Client 1 earns $80,000 and Client 2 earns $120,000. Some additional details to consider are expressed below:
Client 1
- Sex – Male
- Age – 35
- Salary – $80,000 p.a.
- Occupation – Office Worker
- Life cover (stepped) – $1,000,000
- TPD cover (stepped) – $1,000,000
- Income Protection cover (stepped) (90-day wait, benefit period till age 65) – $4,666 per month benefit
Client 2
- Sex – Female
- Age – 35
- Salary – $120,000 p.a.
- Occupation – Office Worker
- Life cover (stepped) – $1,000,000
- TPD cover (stepped) – $1,000,000
- Income Protection cover (stepped) (90-day wait, benefit period till age 65) – $7,000 per month benefit
To understand the implications of the commissions charged on the total premium amount, we have broken up the fees over the first year to compare the premium amounts, inclusive and exclusive of the commissions.
| Client 1 | First Year Premium p.a. (inclusive of commission) | First Year Premium p.a. (exclusive of commission) | ||
| Life Cover | $361.22 | $252.85 | ||
| TPD Cover | $286.19 | $200.33 | ||
| Income Protection | $637.27 | $446.09 | ||
| Stamp Duty | $31.86 | $22.30 | ||
| Total | $1,316.54 | $921.57 | ||
| Client 2 | First Year Premium p.a. (inclusive of commission) | First Year Premium p.a. (exclusive of commission) |
| Life Cover | $284.16 | $198.91 |
| TPD Cover | $286.19 | $200.33 |
| Income Protection | $1,227.46 | $859.22 |
| Stamp Duty | $61.37 | $42.96 |
| Total | $1,859.18 | $1,301.44 |
Whilst the total amount may not seem significant over the first year, the client’s total savings accumulates over time, with Client 1 is looking at saving $7,064.41 accumulated over a 10-year period and Client 2 is looking at saving $9,685.47.
| Client 1 | Premium in 10-years p.a. (inclusive of commission) | Premium in 10-years p.a. (exclusive of commission) |
| Total | $3,092.42 | $2,164.69 |
Accumulated Savings = $7,064.41
| Client 2 | Premium in 10-years p.a. (inclusive of commission) | Premium in 10-years p.a. (exclusive of commission) |
| Total | $4,128.58 | $2,890.00 |
Accumulated Savings = $9,685.47
Total savings with no commissions over a 10-year period for the couple is $16,749.88.
Important assumptions to note relating to the following case study include:
- Value of the cover is not indexed and will remain the same throughout the duration of the policy.
- Premiums are paid yearly.
- Life and TPD insurance are linked.
- Income protection is an indemnity value.
- Occupation class (for MLC) is A.
- Clients are non-smokers and live in NSW.
- Premiums paid via Wrap.
EPG Wealth Standpoint
Here at EPG Wealth, our advisers do not believe in charging a commission for insurance related advice. Through doing so, our advisers embody the company’s core values of establishing, protecting, and growing the assets of our clients through providing unbiased and impartial advice.
If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.