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Too many Australians are unaware of the valuable inclusion of life insurance in their financial planning strategy. It is both a tool to protect and secure wealth and ensure the needs of their families are met if the unthinkable were to happen.
In each stage of life, there is a life insurance strategy to consider for the changing needs of policyholders, and My Money Sorted is committed to being an expert and reliable resource for those considering their options.
Australia has a robust and safe life insurance industry that best serves policyholders’ needs, and substantial credit is due to the Life Insurance Act of 1995 and other financial services regulations. So what does the Life Insurance Act cover, how does it protect consumers, and why is life insurance such a necessity? We will explore and answer these questions in detail.
This extensive information on the Life Insurance Act 1995 is designed to keep you informed so you can find the right life insurance solutions for your needs.
Jump straight to…
- Too many Australians are unaware of the valuable inclusion of life insurance in their financial planning strategy. It is both a tool to protect and secure wealth and ensure the needs of their families are met if the unthinkable were to happen.
- Life Insurance Act 1995
- Other Legislation for Life Insurers and Friendly Societies
- Background of the Life Insurance Act 1995
- References
Life Insurance Act 1995
The Life Insurance Act 1995 put in place standards of regulation for life insurance companies in their prudential standards, business operations, and the sale and closure of the companies.
Supervisory authority was handed to the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC).
APRA’s mission is the regulation of the prudential practices of life insurance companies, including the design and management of practices and standards. The role of ASIC is to ensure consumer protection which includes upholding advisor conduct, market integrity, and insurance product sales and advice.
Other Legislation for Life Insurers and Friendly Societies
A friendly society is defined as an Australian, not-for-profit company that is mutually owned. They provide financial benefits, such as sickness cover, funeral costs, retirement benefits, and hospital insurance for their members. They can only be referred to as a friendly society once registered as a friendly society by APRA under the Life Act.
Australia has enacted substantial amounts of legislation for the regulation of both life insurers and friendly societies, including:
Financial Sector (Shareholdings) Act 1998 requires approval to acquire more than 15% of shares in a particular financial sector company, including:
- An authorised deposit-taking institution
- An insurance company
- A holding company of an ADI or insurance company
Insurance Acquisitions and Takeovers Act 1991 sets rules for acquisitions of Australian companies for acquirers to carry on insurance under the Insurance Act or the Life Insurance Act.
Requirements for notifications are triggered when assets are acquired or other agreements are made with directors. Specific proposals require notice to the Treasurer.
The Financial Sector (Transfer and Restructure) Act 1999 provides the Australian Prudential Regulation Authority (APRA) with the directions for treating voluntary and compulsory transfers of business. Additionally, it provides for the treatment of compulsory transfers of shares or regulated or related bodies.
Financial Sector (Collection of Data) Act 2001 enables the APRA to collect information to help to assist its functions and exercise its powers. It may publish the information given by financial sector entities.
Additionally, the agency may assist another financial sector entity in performing its functions or exercising its powers and assisting the minister in formulating financial policy.
These are just a few of the acts that have come about to ensure the transparency and fiduciary duty of the industry.
Australia has taken great care to ensure the industry best serves all Australians and enables them in planning for a successful financial future for themselves and their dependents.
Background of the Life Insurance Act 1995
The Act was instituted as additional protection for policyholders due to the essential nature of life insurance policies in protecting families and their finances. It is a way to further instil trust in the industry, as far too many Australians have not historically held life insurance policies despite their essential nature.
Less than half of Australians have enough life insurance to cover basic needs for their families in the unfortunate event of their passing. This lack of insurance creates an underinsurance gap of $1.833 billion.
Due to this Act and others, Australian life insurance companies are among the safest and most transparent globally, and additional amendments have further bolstered this safety.
Australians are insured with full knowledge that they are protected, yet too few maintain adequate coverage.
Contents of the Act
The Act is substantial in its contents, comprising twelve parts. It covers every aspect of the life insurance industry and every entity involved in a life insurance offering.
The Act states its main objects as:
- to protect the interests of the owners and prospective owners of life insurance policies in a manner consistent with the continued development of a viable, competitive, and innovative life insurance industry; and
- to promote financial system stability in Australia.
It specifies an additional operation of the Act that it specifies it applies to:
- Corporations
- Subsidiaries
- Subsidiaries of registered non-operating holding companies (NOHCs)
The Act regulates and defines:
- Life policies
- Continuous disability policies
- Issue and ownership of policies
- The life insurance business
- Classes of life insurance business
- Declarations that the insurance or annuity business is a life insurance business
- Acknowledgments another financial business is life insurance business
- Business of a statutory fund
- Investment account benefits, investment-linked benefits
- Participating, non-participating benefits
- Relevant group of bodies corporate
- Related bodies corporate and subsidiaries
Companies matching these definitions are required to keep records of the income and expenditures of each fund to record the company’s transactions as they relate to each class of the fund, each category of business, and each subcategory of business.
Overseas funds are also regulated, though not as extensively, and all records must be kept in Australia.
Great companies, like My Money Sorted, only work with insurers that comply with these requirements and provide all relevant information to our clients.
The Act defines a life policy as:
(a) a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;
(b) a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;
(c) a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life;
(d) a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph;
(e) a continuous disability policy;
(f) a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;
(g) a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.
Statutory Funds of Life Insurance Companies
A statutory fund is a fund that is established in the records of a life insurance company and relates solely to the life insurance business of the company or that particular part of the business.
The Act outlines the requirements of statutory funds, explicitly spelling out that any amounts received by a life insurance company regarding the business of a benefit fund can only be allocated to that fund. Also, any assets and investments related to the fund’s business must be included in the fund.
As payments and assets must be related only to the fund for which they apply, all liabilities must be paid only with the fund’s assets. Those assets are only available for expenditure related to the conduct of the business.
Statutory funds may not be restructured or terminated without APRA approval. A fund is only to be dealt with in such a way that protects the interests of policyholders and is consistent with prudent management of the fund.
A life insurance company must have at least one statutory fund in respect to its life business but may have more if it so chooses.
Companies have substantial duties concerning statutory funds and must always give preference to the owners and potential owners of policies referable to the fund. Every Act or decision must be taken with priority given to the owners or prospective owners.
The assets of a statutory fund are defined as the balance of money in the fund, assets of the company gained as a result of an expenditure of the fund, investments held by the company as a result of expenditure from the fund, and any other money, investments or assets transferred to the fund.
These fund assets must be kept separate and distinct from other funds or all other monies, investments, or assets.
Every policy must specify the fund or funds to which the policy is referable. Any policy benefits must be paid from the statutory fund.
The proper maintenance of a statutory fund, never commingled with other funds, is a commitment My Money Sorted takes very seriously and will only deal with fully compliant companies.
Financial Records and Statements
The Act is particular about the maintenance of financial records and statements.
Those statements must be kept for the income and outgoings of each fund and adequately record the affairs and transactions of the company concerning the classes of life insurance to which the fund relates, the categories of business within each class, and each subcategory of business.
The classes of life insurance businesses are divided into the categories of Australian participating business, overseas participating business, and non-participating business.
Company Auditors
Each company must have an auditor on staff to perform the functions of an auditor set out in the prudential standards. Should the principal auditor cease to act as such, the company must appoint another within six weeks.
APRA can also provide a written notice requiring a company to appoint a person who has specialist qualifications or the experience to perform a particular purpose.
The Act is particular that an auditor can only be appointed if that person meets the eligibility criteria or in the prudential standards. The company must end the appointment of an auditor that does not meet these standards or if the person has failed to adequately and appropriately perform the functions and duties of an auditor.
Auditor appointments require written notice to APRA with the person’s name, appointment date, and any matter specified in the prudential standards. Notice must be given within 14 days of the appointment. Should the auditor cease to be such, the notice must be provided to APRA within 14 days.
Auditors have considerable power within a company and are essential agents for APRA within the company. If the auditor feels that a life company or subsidiary of the company may have contravened the Act, the auditor must inform APRA immediately.
The auditor may produce the books, accounts, or documents of the company if the auditor feels that doing so helps APRA in performing its functions.
APRA may also require such information to be provided by the auditor upon written notice to that person. For an offence committed by giving false or misleading information, the penalty can include imprisonment for six months.
APRA must be informed if the auditor is aware of any attempts to unduly influence, manipulate, coerce, or mislead the auditor in connection with the auditor’s functions. Should the auditor commit an offence, imprisonment for 12 months can result.
Penalties are even stiffer for any employee or officer (an officer has the same definition as the Corporations Act 2001) of a life company that provides an auditor with false or misleading information.
Suppose the person allows information about the life company to be given to the auditor and knows the information is false or misleading. In that case, imprisonment can be for up to five years.
If the same circumstances apply, but the information is misleading or false regarding a material particular, and the person didn’t take reasonable steps to ensure the information wasn’t false or misleading, imprisonment can be two years.
Actuaries
In the same manner, as appointment and reporting requirements, a life company must have an appointed actuary.
Appointment, end of the relationship, and required reporting to APRA are similar to the auditor’s requirements, and the actuary’s requirements for reporting to APRA are also identical and expected.
Policy Owner’s Right to Copies of Reporting Documents
Any owner of a policy issued by a life company is entitled to a copy of reporting documents related to the company. If the reporting standard determines that a copy or portion of the document is to be provided and requested by the policy owner, copies must be provided free of charge.
Referring Matters to Professional Industry Associations for Auditors and Actuaries
APRA may refer details of matters where it believes an auditor or actuary has failed in their duties under the Act to professional associations that APRA feels will be involved in considering disciplinary action.
APRA may also choose to refer the details of auditors to the Companies Auditors Disciplinary Board. Likewise, auditors or actuaries can be reported by APRA if they feel the person is not a fit or proper person for their role.
APRA may also direct the removal of an auditor or actuary through written direction to a corporate body if they feel there are adequate grounds for termination.
A direction to end a person’s appointment will take effect on a day specified, at least seven days after the order. If a body corporate fails to act with the order, penalty units will apply.
Monitoring and Investigation of Life Companies
Just as the Act provides APRA substantial power in regulating life companies and non-operating holding companies (NOHCs), tremendous power also exists for continuous monitoring and investigation.
A regulator may give a body corporate written notice to provide any information relating to the body’s business, any matter relating to the business of a subsidiary, or a copy of any document held by the body.
Breach of the Act
Life companies are required to immediately notify APRA in matters where they become aware that they have breached or will breach any provision of the Act.
The provision relates to the company’s financial obligations to the owners of policies or the company’s minimum capital requirements. A failure to notify APRA is considered a breach and causes a penalty.
However, if the breach is revealed by the auditor or the actuary of the company and the auditor or actuary informs the company they have already notified APRA, the company is not in breach if they have no reason to disbelieve the auditor or actuary.
Suppose the breach or coming breach of a provision materially and adversely affects the body’s financial position or is significant. In that case, APRA must be notified with a written report as soon as is practically possible and no later than ten days from becoming aware of the breach.
An authorised person (APRA representative) may access any premises of a body corporate of a life company at any reasonable time to inspect any records found on the premises. The authorised person may take extracts from or make copies of the documents.
Enforcement and Investigation
APRA has far-ranging and consequential authority in the enforcement and investigation of compliance failures.
The agency may apply to the Court for orders directing compliance, fines up to any amount of ill-gotten financial benefit, and compensation to anyone that has suffered a loss due to a breach.
APRA may also present a body corporate a written notice inviting the body to provide a written statement of why the regulator should not investigate or any other written material to support its assertion.
A show-cause notice from APRA must specify the grounds on which the period to provide the statement and written material to the regulator is given.
Cases where the regulator has grounds for a show-cause notice to be given to a body corporate include:
- The body is likely to become unable to meet its policy or other liabilities.
- The body may have contravened this Act, the Life Insurance Act 1945, or the Financial Sector (Collection of Data) Act 2001.
- The body has not complied with the notice re.
- A breach has occurred.
- The ratio of expenses for the most recent year of the costs of conducting business in relation to the premiums is unduly high.
- The method used to apportion income and expenses between classes of the life insurance business and other businesses is inequitable.
- The ratio of the total amount of premiums falling due but not paid to the premium income is unduly high.
- Information in possession of the regulator calls for an investigation of the whole or any part of the company.
- The body is a registered non-operating holding company with information that calls for its investigation.
APRA may investigate:
- if the show cause notice has been given and the body has consented to the investigation
- the period specified in the notice has expired without a statement from the company
- the regulator is satisfied that grounds exist where it is in the best interest of the policy owners to investigate the company.
- if it is in the public’s best interest to investigate a registered NOHC.
All requested documentation must be provided to the regulator, and access must be allowed to the premises. If the regulator feels that information is not being produced and resides at a specific premise, the regulator may apply for a warrant to search the premises for those records.
Enforcement of the warrant can include a member of the Australian Federal Police named in the warrant enabled to such assistance and force necessary to search.
Any attempts to conceal information or refusal to produce it are considered criminal violations.
After the investigation has finished, the regulator must provide the written conclusions to the body corporate.
At My Money Sorted, we partner with life insurance companies with only the best auditors and actuaries.
Judicial Management
APRA may ask the Court for an order to place a life company or a part of the business under judicial management. Should the Court be satisfied that the investigation has been performed and in the best interest of the policy owners, the company may be placed under judicial management.
Other instances where the Court might determine the company should be placed under judicial management would be when the company is likely to become unable to meet its policy or other liabilities that financial year or has failed to comply with the prudential standards related to solvency or is in contravention of the law.
Some other reasons would include a belief that the financial position or company management is unsatisfactory or that the time needed for a full investigation of the life insurance business would likely prejudice owners of policies.
The Act lays out all of the responsibilities and requirements of judicial management in detail to the point of winding up the company.
Under judicial management, no other court orders pertaining to property of the company may be enforced, no supplier may demand past-due compensation to perform or deliver current demands of the judicial manager, and no proceeding in a court or tribunal may continue during the period of judicial management.
Leave may be granted for these instances if a court feels considerable harm might be caused or if so requested by the manager. If someone is applying for leave of the Court, APRA and the judicial manager must be given ten days’ notice, and APRA can apply to be joined as a party to the proceedings for leave.
When in judicial management, not only do moratoriums go into effect, but all company officers cease to have their prior powers and functions. All powers and functions transfer to the judicial manager.
In turn, the judicial manager is subject to the control of the Court. The judicial manager may always apply to the Court for instructions but must provide APRA with a notification when doing so.
The judicial manager has wide-ranging powers in their undertakings that include:
- To defend or bargain in legal proceedings in the name and on behalf of the company
- To appoint a legal practitioner for assistance
- To appoint an actuary for assistance
- To sell or dispose of all company property as a liquidator
- To do and execute all acts on behalf of the company
- Use the company’s seal
- Prove in the bankruptcy of any debtor
- Draw, accept, make, and endorse any promissory note or bill of exchange on behalf of the company
- Obtain credit on the security of the company
- To do anything necessary to obtain payment or remuneration from a debtor or provider
- Appoint an agent to do anything not practicable by the judicial manager
- Issue, acquire, sell, cancel, change the rights to, or reduce shares
Transfer or Amalgamation of Life Insurance Business
A life insurance business may not be transferred to another life company or amalgamated with another company’s business unless the scheme is Court confirmed. The scheme must spell out the agreement or deed under which the transfer or amalgamation executes.
When such a scheme is proposed, APRA may arrange for an independent actuary to make a written report. Additionally, APRA is entitled to be heard on any such application to the Court. The Court may then confirm the scheme, request modifications, or refuse to confirm.
Provisions Relating to Policies
The Australian Securities and Investments Commission (ASIC) is the regulatory authority regarding provisions relating to policies. Like APRA, ASIC may give written notice requiring submissions of any form of proposal or policy document used by a company in Australia.
The Life Insurance Act 1995 spells out the rights of policy transferees and how the assignment of policies or transfer of assets may transpire. The transfer of a policy is possible when signed by both parties and done with a memorandum of transfer in accordance with the form prescribed by regulations.
The form must also be signed by the principal executive officer of the life insurance company or an authorised representative.
A transferee has all the rights and powers as a transferor under the policy. Payment to the transferee of money due discharges the life company of liability as it would payment to the transferor. A transferee is considered to be the absolute owner of the policy.
The surrender of a policy by a transferee is effective despite any trust, interest, equity, or right of another person. The life insurance company is not concerned with the circumstances of assignment.
An assignment by mortgage or trust does not work through a memorandum of transfer and must be created through other means. However, the transferee may be the trustee or trustees of a superannuation fund.
Should a trustee change, the new trustee may give the life insurance company written notification that they are the new trustee under the trust. The life insurance company may record the new trustee as the policy owner.
Protection of Policies
The rights and interests under a life policy effected on a person’s life or of the person’s spouse or de facto partner do not have liability for application or made available by any judgment, order, or process in discharge of a debt. This provision applies regardless of when the policy was issued.
This protection applies to money payable from a policy except if the payee had entered into a contract that specified as much or that the policyholder expressed direction as much in a will.
Surrender Values, Paid Up Policies, and Non-Forfeiture Policies
A policy may be requested to be surrendered when no contract is in force for the owner to make any payments of premiums if it is after the first year for which the policy is in force. This surrender provision also applies to insurance contracts that have been in force for at least three years.
The request must be in writing, and the company must pay the owner an amount equal to the surrender value, less the debt owed.
APRA may authorise a life company to suspend or vary its obligations to surrender if APRA thinks the payments would impact the financial stability of the company or the request is in the best interest of the policyholders. The suspension period or variation is for such a period as APRA thinks fit.
If premiums on a policy have been paid for at least three years, the owner may request to vary the policy so that no further premiums are payable and treat the policy as a paid-up policy. With a request in writing, the life company must vary the policy, and the policy as varied is to be taken as a paid-up policy.
A policy is not liable for forfeiture only because of non-payment of a premium if at least three years of premiums were paid and the policy’s surrender value exceeds the amount of any overdue premium. The surrender value is to be worked out as at the day the overdue premium falls due.
A life insurance company may only forfeit or force cancellation or revocation of a policy for non-payment of premium if written notice has been given to the policy owner that sets out the amount of the premium and the date due. The statement must be made that the policy will be forfeited at the end of 28 days after notice is given if the payment is due.
Payment of Policy Money
A life company may pay a policy to the spouse, de facto partner, parent, child, brother, sister, nephew, or nephew of the deceased person or any person that satisfies the company that they are entitled to the property of the deceased under the will, a law relating to the disposition of property, or satisfies the company that they are entitled to obtain probate of the will for letters of administration for the deceased’s estate.
If a policy owner who is not the insured dies, the policy is calculated for its surrender value and paid as such in accordance with the applicable subsection of the Act.
What is the Purpose of the Life Insurance Act 1995
Your head might be spinning after reading the most important provisions of the Life Insurance Act 1995. The Act even goes into detail on the treatment of policies on children, what to do if documents are lost or destroyed, and the registration requirements of companies. We’ve done our best to summarise the essential parts of a very long act.
The purpose of the Act is apparent in the reading of it. It sets out a regulatory structure, expectations, and directives for life insurance companies. While we have looked at domestic provisions, the Act also has provisions for an eligible foreign life insurance company.
The Act benefits policy owners and ensures faith in Australian life insurance companies. Knowing the law is robust in its regulation and requirements for the industry assures Australians that they are protected when purchasing such a critical part of their financial planning strategy for general insurance.
We are committed to providing outstanding guidance on life insurance to our clients. My Money Sorted is a premier source for information and assistance in all phases of your financial journey.
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- https://www.legislation.gov.au/Series/C2004A00315
- https://www.legislation.gov.au/Series/C2004A04297
- https://www.legislation.gov.au/Series/C2004A00436
- https://www.legislation.gov.au/Details/C2019C00171
- https://www.legislation.gov.au/Series/C2004A04860
