Insurance commissions drive overselling

High upfront insurance commissions result in dramatic overselling of products to people who cannot afford it, according to former Money Management Financial Planner of the Year Neil Kendall.

Kendall pointed to commissions in excess of $40,000 a year acting as an incentive for overselling.

He recently dealt with a new client paying a $40,000-a-year life insurance premium, yet the client did not even know who the beneficiary was or how those benefits would be distributed.

"They had no idea. It had never been discussed," Kendall said. "The adviser got $43,000 or $44,000 in commission, so they were very focused on getting an insurance sale … but there was no reward for giving good advice."

Kendall said the situation was a testament to one of the fundamental conflicts around insurance commissions.

"If that adviser had said to them they actually don’t need this much life insurance, they need half as much, they would have halved their commission."

Kendall said in this case not only was the client oversold but the insurance was doubled up within the products that were selected. Ultimately, on re-examining the client’s circumstances, Kendall was able to get them adequately insured for a $6,500 premium a year, without paying commissions, by going elsewhere for a better deal.

Kendall said the overselling of risk insurance products was not uncommon, although he conceded this was a dramatic case of a financially naïve person being taken advantage of. He said underinsurance or advisers simply ignoring insurance were much more prevalent problems.

Another Money Management Financial Planner of the Year and life risk specialist Peter Roan also cited an extreme example: an apprentice mechanic had about $400,000 of death and total and permanent disability cover through a super fund, but the only thing covering the premiums was the employer contribution. The teenager’s mother was concerned that his super was being depleted and approached Roan for advice.

"He didn’t need it and he couldn’t afford it," Roan said.

"How did that previous adviser come up with $400,000?" Roan asked, asserting that it had probably been a commission-driven decision.

Roan said change was needed at the dealer group, fund manager and product manufacturer levels as sales targets, incentives, volume bonuses and rebates fell into their domain.