Insurance commissions in Australia: What you are really paying for
Insurance commissions are one of the most misunderstood elements of life insurance advice in Australia. The very word, ‘commission’ can make people feel uneasy. It can make people think of hidden motives or additional costs, disguised in your premiums.
The reality is far more structured.
Insurance commissions in Australia operate within a layered regulatory framework that includes prudential supervision, legislative control and specific commission caps introduced under reform.
Understanding that structure changes the conversation.
Who governs life insurance in Australia?
Before discussing insurance commissions, it is important to understand the regulatory environment surrounding life insurance itself.
Life insurers are supervised by the Australian Prudential Regulation Authority.
The Australian Prudential Regulation Authority supervises life insurers to ensure they remain financially sound and able to meet their obligations to policyholders (APRA).
This means insurers operate under strict capital requirements and prudential standards. Distribution costs, claims management and product pricing exist within a heavily regulated system.
Insurance commissions do not operate in isolation. They sit within this broader prudential framework.
What law governs adviser remuneration?
Financial advisers are regulated under the Corporations Act 2001.
Part 7.7A of the Act contains provisions that prohibit conflicted remuneration. Section 963 defines conflicted remuneration as a benefit that could reasonably be expected to influence the advice given to a client.
Under these provisions, advisers cannot receive benefits that create conflicts of interest in relation to financial product advice (Australian Government).
This means advisers cannot receive:
Volume-based bonuses
Higher commission rates for recommending one insurer over another
Incentives tied to product selection
Insurance commissions must operate within these legal constraints.
What did the Life Insurance Framework change?
Insurance commissions were restructured under the Life Insurance Framework reforms.
ASIC’s Regulatory Guide 275 explains that the reforms introduced caps on upfront and ongoing commissions, along with clawback arrangements, to reduce incentives for inappropriate policy replacement (ASIC RG 275).
These reforms were designed to reduce structural conflicts and improve long-term consumer outcomes.
This is not an industry preference. It is a regulatory requirement.
How do insurance commissions work?
Insurance commissions in Australia have two components:
Upfront commission capped at 66 percent of the first year’s premium
Ongoing commission capped at 22 percent of the premium each year the policy remains in force
These caps apply uniformly across insurers.
“There’s no secrets around commissions and it is heavily legislated.”
Commissions must be disclosed to clients in both percentage and dollar terms.
They cannot increase based on production volume. They cannot be adjusted upward to favour one insurer over another. They are constrained by law and regulatory guidance.
Insurance commissions today look very different to how they operated before reform.
What is a clawback and why does it exist?
Under the Life Insurance Framework reforms, clawback rules apply to upfront commissions if a policy is cancelled or reduced within the first two years.
Put simply, if a policy is set up and then changed shortly after, the insurer can take back some or all of the upfront commission paid to the adviser.
The structure works like this:
100 percent of the upfront commission is clawed back if the policy is cancelled within the first 12 months
60 percent is clawed back if it is cancelled between months 13 and 24
If cover is reduced within the first two years, a proportional amount of the upfront commission is clawed back
After 24 months, no clawback applies
These rules were introduced under the Life Insurance Framework reforms to reduce incentives for inappropriate short-term policy replacement. ASIC Regulatory Guide 275 outlines how these arrangements operate in practice.
In practical terms, this means advisers do not benefit from setting up cover that is later reduced or cancelled soon after commencement.
Why do advisers use a commission model?
Insurance advice is not transactional.
It involves:
Researching multiple insurers
Comparing definitions and exclusions
Structuring cover levels
Managing underwriting and medical disclosures
Preparing compliant advice documentation
Providing long-term servicing
Supporting clients through claims
“Commissions are essentially a way for us to get paid without having to charge someone a direct fee.”
The commission model distributes the cost of advice over the life of the policy rather than requiring large annual invoices.
Without insurance commissions, advisers must recover costs through:
Higher upfront advice fees
Ongoing service fees
Potential claim-related charges
The cost does not disappear. It changes structure.
Why charge an initial fee as well?
A hybrid model includes both:
An upfront advice fee
Insurance commissions
The initial fee covers part of the upfront work, including research, structuring, compliance and documentation.
The commission supports long-term responsibility and servicing.
“The cost of advice in Australia is massive, we see that receiving a commission is a twofold win.”
Separating the two reduces distortion:
The fee covers completed work
The commission supports future service obligations
Without an upfront fee, complex advice cases that do not proceed can create commercial pressure. Without commissions, ongoing servicing must be charged directly each year.
Does going direct mean you pay less?
One common belief about insurance commissions is that removing them automatically reduces premiums.
In some cases, identical policy structures can be priced the same whether purchased directly or through an adviser.
Life insurers must fund:
Marketing
Claims infrastructure
Distribution
Compliance
Administration
All within prudential supervision by APRA (APRA).
Removing adviser commissions does not remove insurer expenses. It changes how distribution is funded.
The difference between direct and advised distribution is often not just price. It is the inclusion of structured advice and ongoing support.
Does a fee for service adviser save money?
Turning off insurance commissions reduces the premium.
However, a fee for service adviser must charge direct fees to recover costs.
Example comparison over 10 years:
Commission model:
Total premiums: $25,178
Adviser remuneration including fee: $6,184
No commission model:
Lower premiums
Upfront fee approximately $3,600
Ongoing annual fee approximately $385
Total over 10 years: approximately $26,258
With one review at year five: approximately $29,531
The premium saving exists. But once fees are included, total cost can equal or exceed the commission model.
If claim assistance is charged separately, total costs may increase further.
Insurance commissions are one funding mechanism. Removing them does not remove adviser cost.
Are insurance commissions inherently conflicted?
Every professional remuneration structure contains potential conflicts.
Commission model links remuneration to premiums
Hourly billing links remuneration to time
Percentage claim models link remuneration to payout size
The question is not whether conflict exists. It is whether it is regulated.
Under Part 7.7A of the Corporations Act 2001, conflicted remuneration is prohibited (Australian Government). Under RG 275, commission caps and clawback provisions were introduced specifically to reduce structural incentives (ASIC).
Insurance commissions in Australia are:
Legislated
Capped
Disclosed
Subject to best interest duty
That framework does not eliminate scrutiny. It creates guardrails.
What should you focus on instead?
When assessing insurance commissions, consider:
Total cost over 10 to 20 years
What servicing is included
Whether claims support is covered
Transparency of disclosure
Alignment with your needs
Insurance commissions are not automatically good or bad. They are a regulated funding structure within Australia’s financial advice system.
Clarity comes from understanding structure, not reacting to terminology.
Resources
Australian Prudential Regulation Authority – Life insurance supervision and statistics
Australian Government – Corporations Act 2001 (Conflicted remuneration provisions)
Australian Securities and Investments Commission – Regulatory Guide 275: Life Insurance Framework