The Hayne royal commission’s interim report and policy questions document has challenged the life insurance sector over continuing poor quality advice and links to commission payments.

“Put shortly, if crudely, sales staff can be rewarded by commission; advisers should not be,” the interim report released on Friday says.

The report anticipates that arguments for the existing regulatory model to remain will be based on history and the need to maintain the availability of advice and calls for the industry to justify its position.

“What evidence is there that shows that the costs of doing away with payment by commission will outweigh the benefits of improving the overall quality of advice that is given?”

The report flags possible increased regulation of funeral expense policies, which unlike funeral life policies are not covered by Corporations Act requirements to act efficiently, honestly and fairly.

It also asks if particular funeral policies are financial products warranting intervention by the Australian Securities and Investments Commission.

The interim report covers issues from the first four rounds of royal commission hearings, while the policy questions document, released on Wednesday, relates to round six of the hearings, focusing on life and general insurance.

The document asks if life insurers should be prevented from denying claims due to unrelated pre-existing conditions and if medical information sought should also be limited to matters tied to the claim.

It questions if insurers should be stopped from conducting surveillance on someone with a mental health condition, and asks if current regulations are enough to ensure surveillance is appropriate and won’t cause harm.

More broadly, it asks if there are there particular products, like accidental death and accidental injury products, which should not be sold.

Questions are also raised over insurance in superannuation, unfair contract terms, and the effectiveness of the life insurance code of practice.

Financial Services Council CEO Sally Loane says the interim report has raised many significant and important policy questions.

“The FSC will develop a full response to the questions raised by the royal commission and outline a course of action for our members in due course,” she said in a statement.

Responses to the interim report are due by 5pm on October 26, while submissions to the questions paper are due by noon on October 25.