The FSC recently published its submission to the Quality of Advice Review that importantly included a response to Treasury’s evaluation of the Life Insurance Framework (LIF).
In our submission the FSC recommends retaining LIF because it has been successful in managing potential conflicts between advisers and consumers by providing an affordable mechanism for consumers to get personal advice on life insurance.
Since LIF was established, it has aligned adviser and consumer interests by improving the quality of advice as evidenced by:
- Less re-broking
- Significantly fewer lapses in the early policy years
- A decrease in clawbacks
- An increase in the duration that consumers retain their policies.
Increased choices under the Life Insurance Framework
LIF gives consumers greater choices and protection when taking out life insurance through their financial adviser. For example, people using an adviser have the protection afforded by the adviser’s Best Interests Duty. To fulfil this duty, advisers consider a range of factors when recommending one product over another either through retail or through group insurance. In practice, this is not a binary choice and advisers will often recommend retaining default group insurance and topping it up through an individually underwritten retail policy.
Advisers can also recommend setting up life insurance either inside or outside of superannuation to maximise the tax and other benefits aligned to the person’s needs and objectives. For example, Income Protection (IP) is tax deductible outside of superannuation and, if self-funded, does not reduce the value of SG contributions.
Affordability of Risk Advice
As widely reported, the cost of providing advice has created a cost barrier for consumers to access financial advice. However, LIF helps consumers get affordable personal advice about life insurance by allowing the cost of the advice to be included in the premium and spread over the term of the policy. This is important for people who cannot afford an up-front fee for personal risk advice, such as people getting their first mortgage or starting a family. The life events that trigger the need for life insurance for the first time are often the very reason why people cannot afford an up-front fee.
As shown in a recent article in the Australian Financial Review, the number of licensed advisers has fallen from 24,800 in 2017 to 12,700 last year – of which only half are active in the life insurance market. This decrease in active risk advisers, along with increased cost of providing advice to consumers, is projected to lead to a 17% reduction in the number of people who have retail life insurance policies by 2026 on current regulatory settings.
However, if the LIF remuneration basis were removed, this is projected to mean a 28% reduction in the number of Australians who have retail life insurance policies by 2026. Not only would this mean Australians are less adequately insured, it would also put upward pressure on the cost of life insurance at a time when household budgets are already under pressure.
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