Commission rebate schemes

With health insurance premiums on the increase, switching to a commission rebate service may put some money back in your pocket.
 
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01.Reclaiming the kickbacks

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Hidden financial fees will presumably start winding down with the official launch of the Future of Financial Advice (FoFA) reforms in July – but there will still be plenty to watch out for. 

If you’ve bought your health insurance through a third party such as a financial adviser, online comparison service or broker, for instance, part of what you pay is likely to be passed along to the person who sold you the policy as a sizeable one-off payment, a steady stream of kickbacks (known as a “trailing fee”) or both. While the reforms are meant to put an end to most “conflicted remuneration” schemes, the bad news is that insurance commissions outside of superannuation are exempt. As it happens, about 50% of all insurance policies in Australia are purchased through brokers. 

CHOICE covered the ins and outs of commission rebate services across most of the financial spectrum in a 2009 investigation, but at least two rebate services, YourShare.com.au and BetterBills.com, are now including health insurance in the mix. The timing of this recent development is good, since health insurance premiums increased by an average of 5.6% recently.

Commission rebate services ask you to cut ties with your broker or adviser and allow the service to take over the ongoing administration of your account. Whatever commissions the broker has been getting go to the rebate service, which then returns a portion of them to you. How much they return, and how often they return it, varies from service to service. According to the health insurance commission rebaters we spoke with, signing on to a service can put about $300 back in your pocket every year – money that would have otherwise gone to a broker or adviser who may be doing very little to earn it.

The broker's cut 

The kicker with some insurance products is the upfront commission, which can reach 130% of the first year’s premium in the case of life insurance, followed by as much as a 30% cut to the sales agent every year thereafter. These costs are woven into the premium you pay. Brokers tend to be secretive about how much they’re getting, and the size of the cut varies depending on the arrangement. 

One rebater we reviewed told us commission levels for health insurance currently hover at about 25%. Unless you take out a policy through a rebate service in the first place, rather than handing over the administration of an existing policy, you won’t be getting any upfront commissions back. However, by switching to a rebate service in midstream you can defray your premium costs by receiving a share of ongoing commissions, an opportunity you would have otherwise missed out on. 

How FoFA affects the commission rebate industry in areas where commissions are on the chopping block (such a managed funds) remains to be seen. As late as March this year, ASIC had yet to provide clear direction on whether some financial products with longstanding built-in commissions will be grandfathered even for clients who sign up after the FoFA reforms kick in on 1 July. What is clear, however, is that the commission ban will generally only be applied to arrangements that start after this date.

Why worry?

Why are commissions so bad? Simple. If one insurance product pays higher commissions than another, the broker or adviser may be tempted to recommend the product that pays them more, regardless of its suitability to their client’s circumstances. The setup seems even more sinister when you consider many customers aren’t aware a commission scheme even exists. We expect the FoFA reforms to enable consumers to sidestep commissions altogether in many areas of financial services, but in the case of insurance purchased through a third party, the age-old commission regime will remain intact.


 
 

 

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