The Federal Government is set to launch a major shake-up of the life insurance industry, a sector the corporate supervisor believes is dogged by bad advice and high commissions.

Under the plan, the cost of life insurance policies will be cut and up-front commission rates reduced from 120 per cent of premiums to 60 per cent by 2018.

Ongoing commissions will also be limited to 20 per cent of the premium from January next year.

The industry is working with the Abbott government to implement the changes.

Assistant Treasurer Josh Frydenberg said the industry’s proposals would be considered in the context of the Government’s response to the financial system inquiry chaired by former bank chief David Murray.

Treasurer Joe Hockey recently said that a response to that inquiry was still a few months away.

Asked if consumers had been ripped off, Frydenberg told ABC Radio today that the commissions had not been in their best interests.

An industry-commissioned review by the Australian Securities and Investments Commission, recommended several measures designed to improve consumer outcomes, including a significant modification to the upfront commissions.

Financial Services Council head Sally Leone said life insurance was crucial to a well-functioning and self-reliant community.

She said the package included a new remuneration model, development of a code of conduct, more product choice and a review of statements of advice.

“Bringing the life and advice industries together to undergo an open and independent process in search of reform solutions – including changes in the culture of the industry as a whole – was a groundbreaking approach,” Ms Loane said in a statement.