AIA has urged the federal government to consider tax incentives to encourage take-up of life insurance and related financial advice.

Tax laws currently allow deductibles for income protection cover and related advice fees but not for other life insurance products.

“We believe there is a role for government in incentivising greater take-up of both financial advice and tailored life insurance,” AIA says in a pre-budget submission.

“Australia’s underinsurance gap is growing, with everyday Australians unable to afford comprehensive financial advice and not taking up sufficient insurance cover to protect their lives and livelihoods. 

“The government may wish to consider the tax treatment of financial advice and life insurance as an incentive for take-up of each. While income protection cover and financial advice fees related to this are currently tax deductible, other forms of life insurance are not.”

The life insurer’s submission also says the Productivity Commission’s five-year inquiry report, released in 2023, found regulatory restrictions on private insurance can discourage more efficient service design, thereby limiting innovation and more productive outcomes.

As a result, the submission says, insurers are heavily restricted in the services they can offer, and there are “silos” between services.

“Life insurers can provide rehabilitation focused on return to work but cannot provide benefits that might otherwise be insured by a private health insurer (or that would be eligible for Medicare rebates).

“The Productivity Commission suggested that life insurers could have greater scope to fund (as distinct from promote) evidence-based early intervention and self-management options.

“Mental illness is an area where the role of health and life insurance, as well as workers’ compensation, could be expanded and/or clarified.”

AIA says the overlap between life insurance and workers’ compensation can create confusion and inefficiency, and early intervention options can be lost while claims are processed through different schemes. “We are currently looking at opportunities to better support our claimants to navigate the various support schemes available to them.”