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Will advisers be penalised for making the effort to do the right thing by their client?
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.
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