‘Commission isn’t necessarily a bad thing’
A big point of contention which came out of the debate surrounding The Sunday Times report was the portrayal of commission versus customer fees.
Kathryn Knowles, a specialist protection adviser and managing director of Cura Financial Services, said “commission isn’t necessarily a bad thing”, and explained why.
If commission is paid by the insurer, then a fee isn’t charged to the client. In the absence of commission, Knowles asked: “How would you charge a person a fee who has cancer or multiple sclerosis?”
Her firm largely works with vulnerable customers, and operates on a commission-only basis.
“You might have to triple the fees to cover the time you help them, which borders on discrimination.”
This is because the time taken speaking to underwriters, liaising with insurers and GPs, chasing the insurer, and paying the invoice can stretch into months for more vulnerable clients. Particularly if there is an error in the GP report, or if an adviser needs to study the medical report.
Knowles said this process can “easily” see three or four people in her team “constantly involved” to get cover for them. “Pricing that would be unfair.”
She continued: “Commissions can reduce the price, but usually don’t increase them. [...] I’m not saying no-one abuses the system. There’s pros and cons to all of them, but it’s so important not to be so black and white.”
Carr agreed that “commission may not be perfect but it is far better than the ‘fee-only’ alternative for consumers buying protection”.
Savings aren’t a good alternative
The story suggested consumers could save and invest rather than take out a life insurance policy.
But advisers said it was not so black and white.
“To suggest that investing is automatically a better solution than life insurance is risky at best,” said Carr. “It might be fine if you know when you’re going to die, but most of us don’t.”
David Hearne, a Maidenhead-based chartered financial planner, agreed. “Insurance is for insurance and savings are for savings. They shouldn’t be combined. And you shouldn’t mistake past premiums paid as wasted money if you stop the policy or reach the end of the term,” he said.
This was because whilst a person is paying a policy, it gives them the cover they need when they need it. “And if we’re talking about life insurance then it’s usually good news if you didn’t need it!”
Hearne used the example of when “people call rent wasted money”. “It’s not,” he said, “it paid for what you needed when you needed it.”
The adviser added: “Another comparison is reading a bad book. Just because you’ve read half of it, doesn’t mean you have to read the rest if it’s bad. Similarly with insurance premiums. If you no longer need insurance or there’s something better to spend your money on, you should do that, and not necessarily keep paying because you always have. In behavioural finance it’s known as the sunk cost fallacy.”
