The life insurance remunerations reforms came into effect on 1 January 2018 and introduced an 80% limit to upfront commissions (reduced to 70% on 1 January 2019), with strict clawback provisions starting at 100% of commissions in year one, then 60% in year two and 40% in year three.
These rules were introduced to reduce the level of insurance ‘churning’ where high upfront commissions could be received by planners when regularly moving clients from one insurance policy to another. So now the upfront financial benefits of churning have been reduced and the minimum period between policy movements extended to three years.
The clear message from these new rules are that an insurance policy review should only be conducted three years after the insurance is implemented. However the policy review is only one aspect of a client’s insurance review.
Let’s consider a husband and wife who have both been recommended $2m of Death and TPD cover. As part of their needs analysis they were asked questions around their assets and liabilities, education costs for their three children at private school and their annual living costs. The answer to these and other questions were then used to determine their life insurance needs.
The following year a review of their Death and TPD requirements is conducted and it is determined that their home mortgage has reduced, their investments and superannuation assets have increased in value and, as they are all a year older, we can reduce their expected education and living costs.
The clients are now found to only require $1.9m of Death & TPD cover each and so the adviser can add real value for their clients by conducting this review each year and progressively reducing the client’s insured amounts in keeping with their requirements, therefore saving the client in annual premium costs.
However under the new clawback provisions this would result in the adviser having to pay back a portion of their commission. Effectively being penalised for providing this pro-active advice to their clients.
Under these new rules advisers have no incentive to complete these valuable insurance reviews as the time taken offers no reward but in fact a financial penalty for making the effort to do the right thing by their client.
This seems to be an unintended consequence of the legislation where advisers are now encouraged to conduct a comprehensive insurance review every three years rather than annually.
Find out more about Astute Insurance Planner.
Find out more about Astute Wheel financial products.
This logic is unfathomable. How can the Author possibly think that insurers should fund adviser commissions of even 80% of the premium for parts of a policy that are held inforce for only 12 months. How doe the author think the insurer will remain viable? They are not endless money pits. Life insurance commission model of 120% is viable when the average in force premium is held 6-7 years. At 80% maybe 4-5 years works. But expecting commission and then reviewing everyyear with view to cut or replace is never going to be sustainable. If best interest duty requires reviews every year the commission model has an inevitable problem.
Do Level. Problem solved.
40% claw back in Year 3???
I believe there was some initial discussion of a 3 year claw back before LIF but that never eventuated and was wound back to a 2 year claw back. 100% in year 1 and 60% in year 2.
It is more than a bit of a worry that a company introducing new insurance software (as per the other article today about Astute Wheel in IFA) does not even know the current claw back rules!
Doesn’t seem very astute to me.
the person writing this article should FACT CHECK himself honestly do we have to see unedited articles from people with no idea.
I can see level premiums and fees being the way forward
3 years, where did the 3rd year come from????
I think the article means a review in the 3rd year i.e. after two year responsibility has passed
I was surprised by that. The author mentions 40% clawback in year 3. I don’t remember this being part of LIF though. Is it correct?
No
I have asked this of many BDMs and my licensee, and nobody has an answer. If we act in the clients best interest, we are financially impacted. If we turn a blind eye and only review every few years, we are not best interest. Just one example of a legislation bending too far to the client side to make up for bad practices in the past.
Is the end of this article missing????