Always the bridesmaid

12 June 2008

From good public policy perspectives, governments in Australia have seen it is desirable for elements of compulsion and taxation support to be put in place for retirement savings and health insurance.

This was good policy. Giving people the opportunity to enter retirement with savings in place so they potentially have the choice in retirement to be more independent of government and other taxpayers is desirable.

A key missing plank in this public policy debate is support for life insurance, which delivers significant benefits to Australia as do health insurance and superannuation.

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Exploring superannuation

The latest Federal Budget brought no major changes to superannuation.

That is in some respects a good thing.

The superannuation regime, supposedly designed for everyday people, is extremely complex, especially around the grandfathering of provisions.

Investors today need certainty as to the super rules that apply for their retirement. They need a sound basis to plan around, but there is a wider debate needed in my view around how benefits may be accessed on retirement.

It was no surprise in the May Federal Budget that life insurance, and its value to Australia, was once again overlooked.

At present, the life insurance industry pays out over $4 billion a year in claims. This is a significant saving to Australian society, giving people financial choices and dignity in times of bereavement and illness.

In the end, the taxpayer will pick up the cost of the underinsured, and the fewer financial costs we have on the public purse in the longer term the better.

For those risk-focused advisers, the fact life insurance was once again overlooked is probably a case of business as usual. To many, life insurance remains an overlooked industry.

Life insurance has taken second place to superannuation over the past 20 years.

Despite receiving no government support, the market has grown sharply, almost trebling from about $2 billion in 1998 to $6 billion in 2007.

According to Dexx&r’s Market Projections Report for March 2008, the life insurance market is predicted to treble again by 2017 to almost $20 billion.

This trebling, which I believe should be close to the mark, is driven by underlying consumer need.

Research tells us that consumers see life insurance as complex. People don’t generally understand life insurance, what they have or what they need, as a combination of benefits.

Under today’s Financial Services Reform (FSR) advice regulations, getting simple answers to relatively straightforward personal advice questions on life insurance is not easy.

And FSR makes advice expensive for most people.

Changes need to be made to the advice model to make it easy to understand and easy to access.

There is now a discussion paper out on simplifying the advice model for superannuation, and life insurance must be addressed by the Government as the next step. We need action here.

Tax review

The next step, as outlined in the Federal Budget, is a review of the tax system.

At present, it is clear there are considerable inconsistencies and inequities in how people may access life insurance and how it is taxed.

Accessing life insurance should be simple and easy without unnecessary complications. It should also be driven by consumer needs, not the tax system.

We do need tax changes around life insurance.

There are many consumers who seek financial advice on what is best for their particular circumstance.

When given the choice, most people will often go for what is more tax effective up front but not necessarily in their best interest over the longer term.

Not being driven by tax issues, advisers should be free to look at individual circumstances and make the best recommendation accordingly.

We see a level tax playing field inside and outside of super as not only advantaging consumers, but also advisers and, ultimately, life insurance providers.

And speaking of tax on life insurance, we can only applaud moves in Queensland to remove stamp duty on life insurance policies.

Stamp duty imposed by the states adds enormous costs to the consumer and industry in compliance.

If the industry is to be consumer focused and help close the underinsurance gap, we not only have to look internally to make life insurance simpler and easier to access, but the Government must also help with tax simplicity and consistency.

To use a much over-used statement — it can be a win-win for everyone. The consumer first, with the Government and industry coming after that. Hopefully, the Federal Government’s tax review will recognise this.

Jim Minto is the managing director of Tower Australia Group.

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