Yes, insurance advisers/specialists generally get paid by commission. Isn't that dodgy?
No.
Why get paid by commission?
Life insurance, trauma insurance, income protection insurance, health insurance is insurance that most people know that they need, but don't really want to think about.
It means thinking about bad things. Thinking about dying. Thinking about getting cancer, or having to go into hospital.
As a result, most people don't just 'go out and buy insurance'. It is a grudge purchase.
Even when people go searching on the internet to buy this insurance, they aren't usually jumping up and down to put the insurance cover in place. It takes time to fill in forms, you have to discuss stuff you don't really want to talk about (your past health issues and habits). Then, you might have to go for blood tests, or medicals.
THEN - you have to actually pay for the stuff! Yes, a monthly or annual payment.
All in all, quite an off-putting process, when 'life is probably cool without the darn stuff'.
Well - it isn't 'cool' if something goes wrong and you haven't put in place the insurance cover. As you know (because you are reading this article), insurance is something that many people need unless they have enough money to look after everything if something goes wrong.
So - this is why your insurance expert is generally paid in commissions. Because insurance is a grudge purchase for most people, they aren't at all interested in paying a fee to arrange the cover. Some people do pay a fee to their financial planner as part of their financial plan.
However, for most people, the most effective way of remunerating their insurance specialist is when the insurance company pays them for all their work. This is done by the payment of commissions.
Why should an insurance expert get paid for their work? This is what an insurance expert does to earn the commission:
1. Spends time getting training and expert knowledge to ensure that they understand how insurances works.
2. Needs to be registered as a registered financial adviser, or an Authorised Financial Adviser (AFA). This can involve training, exams and initial and annual fees.
3. Need to find clients. Whether through networking, advertising or other mechanisms.
4. Needs to research the solutions for the clients, make recommendations, tweak recommendations.
5. Work with the client to fill in the application form.
6. Is the go between from the insurance company and the client to get the insurance cover in place.
7. Ensures that everything is understood when the insurance cover is in place.
8. Contacts the client annually to check how things are going, answer any questions.
9. MOST importantly - a good insurance expert is there when you need to claim. This is a stressful time for you and your family and the insurance expert is there (at no charge to you because they have been paid along the way) to help you claim. Unfortunately if you don't choose the right adviser, they might not be around when you need to claim and you may end up handling the claim yourself, or paying an adviser to handle the claim for you.
How do the commissions work?
There are two main ways that commission is paid:
1. Upfront commission plus a small 'renewal commission' OR
2. Level or 'as earned' commission.
Level or 'as earned' commission is usually paid on health insurance policies. Advisers can have the option of taking 'level' commissions, but it can take 5-10 years to 'break even' as compared to the upfront commission, so it is not that common for advisers to do this.
Upfront commission with a small 'renewal commission' is the most common way. These commissions are paid by the insurance company based on the premium that you pay. This is not an additional cost to you, it is built into the premium that you are paying.
The adviser is paid the commission after your insurance policy is in place. If you cancel the policy within a certain time period (generally two years), the insurance adviser has to repay commission to the insurer.
The renewal commission is paid to the adviser on the anniversary of the policy and thereafter. This is designed to remunerate the adviser for 'servicing' the client, and being there to assist with the claims.
How much are the commissions?
These can range depending on the adviser, the insurer and the product. But in general, you could assume that the 'upfront commission' is something like 100% up to 200% of the first years premium, and renewal commissions can be between 4% and 10% of the premium in future.
Isn't this too much?
No, these commissions are required to enable the advisers to run a healthy strong and profitable business and to be there for you when you need them - when you go to claim.
So, I hope that I have given you some useful information on commissions, why they are necessary and how they work. Your adviser will disclose these commissions to you in their Secondary Disclosure document if they are an AFA. If they are not, ask them how much they are earning.
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For more blog articles on insurance, check out these posts:
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By Carey Church
