Advised life insurance taken out as a safeguard around a home mortgage should be exempted from the Government’s tough new rules around add-on insurance, according to the Association of Financial Advisers (AFA).
However, the AFA is arguing that insurance sold under general advice or no advice should not be exempt.
In a submission responding to the Treasury discussion around the Government’s reform to the sale of add-on insurance products, the AFA warned that the situation within which advisers recommended life insurance at the time of taking out a home mortgage appeared to have been overlooked.
It said that, given the scale of the debt involved in a home loan, the issue needed to be addressed.
The AFA said it appeared that the situation of life insurance attaching to the taking out of a home loan appeared to have been inadvertently caught up under the Government’s proposals.
“It is often the case when someone takes out a home loan that they might also take out life insurance,” it said. “The fact that they have taken on significant debt to finance the purchase of a home is a very sensible trigger to consider the adequacy of their existing level of life insurance.”
The AFA submission said that this was often done by a financial adviser working within the office of a mortgage broker or by someone to whom a mortgage broker referred clients.
“Generally, the advice process takes place before the loan is taken out, often during the loan application process to coincide with the completion of the loan and to ensure the client is covered immediately upon commencement of the loan,” it said.
“The products made available as part of this process are the standard retail advised life insurance products with good terms and conditions and much higher claims payment ratios.”
The AFA submission said that the Government had signalled that there were grounds for certain products to be exempt and that advised life insurance should be included amongst the exemptions.
“We consider that it is essential that these exemptions were also extended to all cases where personal financial advice is provided and where the client received a Statement of Advice,” it said. “In our view, this deferred sales requirement should be limited to general advice and no advice business models.”