Life Insurance: Are you getting good value?

ASIC has released a new report calling on insurers to significantly improve consumer outcomes.

ASIC is calling on insurers to significantly improve consumer outcomes following the release of two reports into add-on insurance products commonly sold to consumers when purchasing cars. The reports found that many consumers are being sold add-on insurance products that are expensive and provide poor value, in a sales process that many consumers find confusing and where some can feel pressured to buy products they don’t understand.

Life Insurance

ASIC’s report, The sale of life insurance through car dealers: Taking consumers for a ride (REP 471), found that life insurance sold through car dealers is often substantially more expensive than  comparable life insurance products, provides very low claim payouts relative to premiums, and is sold by car dealers that are paid high commission by insurers on sales.

ASIC reviewed insurers offering life insurance as part of consumer credit insurance policies sold through car dealers. Not all life insurers operate in this market: ASIC reviewed five major life insurers, estimated to make up 90 per cent of this market, and obtained detailed data about the way in which these products operate. REP 471 found that:

  • consumers can pay up to 18 times more for life insurance purchased through a car dealer, compared to similar term life insurance which provides more cover;
  • consumers purchasing a car for their small business could be charged up to 80% more to get exactly the same life insurance cover as a consumer with a personal car loan;
  • life insurance sold through car dealers is priced as an expensive single upfront premium for a multi-year insurance policy. The upfront premium is usually added to the car loan, so consumers pay interest on top of the premium, which can substantially increase the cost of the product. Furthermore, they can  lose out when they repay their car loan early;
  • one in ten policies was sold to consumers aged 18 to 21, who are unlikely to need life insurance; and
  • there is a low level of awareness of the add-on insurance product and its features.

ASIC Deputy Chair Peter Kell said ASIC was calling on the insurance industry to lift its standards.

“The message to industry is clear: substantial improvements need to be made to both the design and distribution of these products. Insurers must address the high costs, poor value and poor claim outcomes of their add-on products, especially when the very same insurers provide alternative products that offer cheaper and more comprehensive cover.”

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Improving life insurance advice

In early February the federal government introduced legislation into Parliament to give effect to some industry-agreed life insurance improvements.

“In November last year life insurance peak bodies reached agreement on the implementation of these changes to improve the quality of advice and increase consumer confidence in the life insurance sector,” Minister O’Dwyer said.

“The legislation builds on the Government’s commitment to better align the interests of financial firms and consumers by addressing the conflicted remuneration arrangements that were exempted under the FOFA reforms for life insurance.

“Currently life insurance advisers are paid high up front commissions up to 120% of the first year premium with low trailing commissions. This can provide a financial incentive to advisers to replace policies even where there is no consumer benefit.

These important improvements, which will commence on 1 July 2016, include:

  • a three-year phase-down of upfront commissions paid to advisers to a maximum of 60 per cent from 1 July 2018, together with the introduction of a maximum rate for ongoing commissions of 20 per cent; and
  • the introduction of a two year commission ‘clawback’ period, which will clawback 100 per cent of a commission in the first year and 60 per cent of a commission in the second year should a policy lapse.

“The need for these reforms was identified in the 2014 ASIC Review, the FSI Inquiry and the industry-initiated Trowbridge Report. I would like to recognise the considerable efforts, in particular by the Association of Financial Advisers, the Financial Planners Australia representing nearly 15,000 advisers, and the Financial Services Council representing life insurers for developing an industry based response,” Minister O’Dwyer said.

“These changes strike the right balance between consumers of life insurance while recognising the need for business viability and industry stability.”

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