The FSC recently published its submission to the quality of advice review which included a response to the Treasury’s assessment of the Life Assurance Framework (LIF).
In our submission, the FSC recommends retaining the LIF because it has successfully managed potential conflicts between advisors and consumers by providing an affordable mechanism for consumers to obtain personalized life insurance advice.
Since its inception, LIF has aligned the interests of advisors and consumers by improving the quality of advice, as evidenced by:
- Less re-brokerage
- Significantly fewer lapses in the first years of insurance
- A decrease in recoveries
- An increase in the length of time consumers keep their policies.
Increased choices under the life insurance framework
The LIF offers consumers more choice and protection when purchasing life insurance through their financial advisor. For example, people who use an advisor benefit from the protection afforded by the advisor’s best interest obligation. To fulfill this obligation, advisors consider a range of factors when recommending one product over another, whether through retail or group insurance. In practice, this is not a binary choice and advisors often recommend retaining group insurance as default and supplementing it with an individually underwritten retail policy.
Advisors may also recommend setting up life insurance inside or outside the superannuation to maximize tax and other benefits based on the individual’s needs and goals. For example, Income Protection (IP) is tax deductible apart from superannuation and, if self-funded, does not reduce the value of SG contributions.
Affordability of risk advice
As has been widely reported, the cost of providing advice has created a financial barrier for consumers wishing to access financial advice. However, the LIF helps consumers obtain affordable personal advice on life insurance by allowing the cost of advice to be included in the premium and spread over the term of the policy. This is important for people who cannot afford an upfront fee for personal risk advice, such as people getting their first mortgage or starting a family. Life events that trigger the need for life insurance for the first time are often the very reason people can’t afford the upfront cost.
As a recent Australian Financial Review article shows, the number of licensed advisers has fallen from 24,800 in 2017 to 12,700 last year – only half of whom are active in the life insurance market. This decrease in the number of active risk advisors, coupled with the increased cost of providing advice to consumers, is expected to lead to a 17% reduction in the number of people who have retail life insurance policies by 2026 within current regulatory parameters.
However, if the LIF earnings base were removed, it is expected 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 well insured, but 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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