We copped some flack this week for standing up for policyholders whose premiums are about to be increased by some life insurance companies. The flack from some professionals in the industry was a little unfair, we thought, with some comments bordering on what we would regard as ‘myths’. I’d like to bust a few of them…

Myth 1

Pinnacle Life sources it’s new business by somehow ‘piggy-backing’ off the hard work of other insurers…

Busted! Pinnacle Life spends significantly on radio/TV advertising and employs its own underwriters and administration staff… fair to say that Pinnacle Life pays its own way for its new business.

Myth 2

Consumers that buy insurance from Pinnacle Life don’t understand what they’re buying…

Busted! It’s patronising to suggest consumers are illiterate and can’t understand a straightforward policy document, particularly when Pinnacle Life won the NZ WriteMark plain English Award in 2009 for its clear and understandable policy wording. We think consumers are smarter than that.

Myth 3

An adviser that switches a policy to Pinnacle Life to achieve a 20% saving for a client, while earning a 75% commission is “shameless”…

Busted!  If that adviser is shameless, what do you call an adviser that switches a policy to achieve a 5% saving for a client and then pockets a 220% commission?

Myth 4

Pinnacle Life’s only point of difference is price…

Busted! Besides offering the most competitive prices in NZ, life insurance policies from Pinnacle Life are jargon-free, straightforward and relevant… and can be purchased online in less than 10 minutes…

There’s a lot going on in the life insurance industry around price increases, brought on by a change in tax legislation. Pinnacle Life made several comments (see Good Returns and Stuff) about insurers unjustifiably raising premiums for their existing policyholders and we’ll stand by that.

The nub of the issue is that we have new tax legislation in NZ specifically for life insurance companies, as mentioned in a previous post. The new legislation effectively increases company tax on life insurance policies sold after 1 July 2010.

But what about policyholders that already have a life insurance policy today? Is there an increase in company tax for these policies?

The simple answer is “no”.  The new tax legislation protects existing policyholders by effectively waiving increased tax on these policies for a period of 5 years. For what it’s worth, the concept has been termed ‘grandfathering’.

So why are some insurers increasing premiums for their existing life insurance customers? After all, there’s no added cost related to these policies so we’ve questioned the logic.

And who’s standing up for these existing customers?

We also wonder what the IRD will make of all this given their extraordinary effort to avoid this happening.

Couldn’t help commenting on this Herald article that talks about the upcoming tax changes for life insurance.

In the article, Sovereign Insurance announced that three parties will shoulder the increased tax burden…  the consumer will take one third (15% increase in premiums), the broker will take one third (commissions reduced from 230% to 200%), and Sovereign itself will soak up anything that’s over.

Well, I have to say, I couldn’t get the math to work.  Watch this…

Selling a policy before the tax change…

• Assume a policy with premiums = $1000.00 pa
• Commission paid @ 230% = $2,300.00

Same policy after tax change…

• Premiums increased by 15% to $1150.00 pa
• Commission paid @ 200% = $2,300.00

Somebody… help!

The media have taken a keen interest in the company tax changes that are about to be introduced for life insurance in NZ.  See Herald and Good returns stories this week.  We did comment on this topic once before (see blog post here) but clearly, with all the renewed interest, we thought it worthwhile to comment again.

What’s it all about?

In 1990, New Zealand enacted new tax rules for life insurance products resulting in life insurance companies today being taxed at a lower rate compared with other companies. The proposed tax changes are ostensibly to ‘remedy’ this situation and bring insurance companies onto an equal footing with all other businesses from a tax perspective.

Who’s benefited all this time from the low tax rate for life insurance?

Well, you’d think it’s been the insurance companies winning all the way to the bank, so to speak.  But… no.  With the competition that exists in the NZ insurance industry (at least 15 insurers in the market chasing less than 2mil tax payers), the price of life insurance has been shaved so that no insurer is making any extra profit from the tax advantage. In effect, the tax advantage has already been passed through to consumers by way of lower premiums.

What impact will the tax changes have on insurance companies?

There are mixed views on this.  Sovereign said this week that premiums would need to increase by 30% to neutralise the impact of the tax changes.  We have every right to disagree, of course.  Pinnacle Life’s view is that the increase shouldn’t need to exceed 20% to neutralise the impact of the tax change. Noel Vaughan (managing partner of Pinnacle Life) said as much in this Herald article last week. He even intimated that anything more than 20% would be profiteering!

So… what’s likely to happen for consumers after the tax change takes effect on 1 July 2010?

We’re not sure. But NZ insurance companies are now starting to announce what they’ll do.

• Sovereign Insurance’s going with 15%
• Pinnacle Life has advised a 10% increase.

We’ll wait and see what the rest have to say.

Ok, we admit we’ve been rather quiet on this Blog lately.

There’s a lot to catch up on, starting with the fact that Pinnacle Life is now advertising on TV.

If you’re a regular TV watcher, you’ll see the PINNACLE LIFE ads on TV3, Prime and some of the SKY channels.

Here’s the first of three ads, right off YouTube… click here to view

Feel free to let us know what you think…?

We all know Christmas can be a stressful time. Family obligations, financial pressures and excess consumption all lend themselves to an insurance claim. We thought we’d give you some insightful hints on how to deal with all this Santa stress.

Ms Clause

A happy Ms Clause makes for a stressfree Santa. Hints… don’t mention the word dry and turkey in the same sentence, do the dishes before you’re asked, don’t make her play cricket, and when she does:- don’t laugh at her inability to catch, bat or understand the purpose of the game. If this is all done right… it may even lead to a little Ho Ho Ho (keeping her wine glass full helps)

Chimney squats

So you’ve been squatting in front of the chimney for the last 12 hours trying to assemble the latest toy for the little elf. Your Chinese is much improved, but clearly not good enough to read a set of instructions. Your thigh muscles are burning, the vital piece seems to be missing, your fore-arm is aching with screw-driver overuse and now Ms Clause is now offering her advice (a bottle of wine will help interpret the Chinese)

In-law sprints

Just the thought of the in-laws gives you angina, and they’re always the first to arrive. So get your head down and sprint in the opposite direction. The longer the sprint, the better the chance of getting your heart rate up and lowering your stress levels. Be thankful for the food, the company and the fact that you only have to see them once a year. (To help, scull a glass of wine as their car enters the driveway)

Managing elves

For once, give them what they asked for… not what’s good for them. Educational toys suck. Make sure you have the batteries and earplugs (also helpful for in-law chatter). Sharing is NOT caring. (a full wine glass also helps your 5am start )

Christmas Carrols don’t rock

It all starts in November with the first Christmas advert.. then the cacophony of endless carols heard at prize-giving, retail shopping, radio stations, TV adverts, banner-ads and soon you’re dreaming for silent nights. Jingle bells don’t rock and Reindeers don’t have red noses or fly. (You need more than a glass of wine for George Michael’s last Christmas)

So if you don’t need the Santa stress, and to keep our claims down, stay at home and buy online.

Following up on Steve’s post a few days ago regarding high commissions, thought a quick comparison of life insurance premiums across the NZ market would indicate just how much more efficient it is to buy your life insurance online.

Take a look at this simple comparison table for two 40-year-olds buying $300,000 life insurance cover… 

 (All prices have been sourced from quotes on NZ website available to the public)

On average you can save over 20% if you buy on-line… go figure J

In June last year insurance commissions were in the news and we wrote this story on our blog. This month, commissions are in the news again. See this article posted yesterday on Good Returns.

We don’t really want to get into the debate all over again (yes, really…) but we think it is important for NZ consumers to be aware of what is going on in their life insurance industry.

In the story we are referring to, insurance companies are now paying commissions of 230% to get brokers to sell their products. Of course, these brokers are absolutely independent and are entitled to sell any insurance products they wish.

Now if you were a broker I’m sure you’d be happy to offer the product for which you’re paid say 150% commission rather than the product paying 230%. You’d always choose the product that’s best for the consumer. It makes perfect sense… wink, wink.

Anyway, as long as NZ consumers realise that buying through a broker chews up the equivalent of the first 2 years and 3 months of your premiums, plus a little more each year thereafter for the life of your policy, then that’s ok.

But it’s also worth knowing that this is one of the key reasons it’s around 20% cheaper to buy life insurance online.  

So, if you know how much life insurance you want, why not go online and save yourself a bundle?    

Driving into work last week I was surprised to hear the chief executive of the ISI (that’s the Investment, Savings and Insurance Association) announce on behalf of the insurance industry a 20 to 25% increase in the price of risk life insurance products due to the change in the tax act.

Having the ISI act as the messenger is real convenient for the insurance companies and banks – they don’t have to fess-up to policy holders about their intended price hikes. Who would want that sort of bad publicity! Better to have the Chief Executive (Vance Arkinstall) of the ISI announce the price hikes – who cares about the ISI brand anyway? 

Well many thanks Vance… but please don’t speak for Pinnacle Life.

Pinnacle has no intention of increasing its prices 20 to 25%. We suggest that a 20 to 25% increase in prices is more about an opportunity to restore the flagging profitability of life insurance companies than offsetting new taxes.

The change in the tax act was inevitable and has been on the cards for a number of years now. We blogged about the new tax act as far back as January 2008… see our blog here. 

Banks and Life Insurers alike have used the peculiarity of the Life Insurance Tax Act to reduce their tax burden.  With the tax law as it currently stands, it is nigh on impossible for life insurers to make a taxable profit on life insurance. In fact, the more policies you sell the greater the tax credit generated.  And we don’t have to look very far back to see how reluctant Banks are to pay their fair share of the tax burden (hint BNZ v IRD)… clearly the insurance tax law has needed an update for quite some time.

The cost of ‘tax’ is already built into insurance premiums; as are admin costs and commissions. How many Life Insurance companies can put their hands up to show any meaningful reduction in admin or selling costs for life insurance, even though we have experienced a huge technology wave in past 20 years? And how many life insurance companies can put their hands up and show how they’ve invested their tax credits back into R&D, or have given the consumer a rebate? I bet none. They took the credits and got fat… now they invoke the weasel clause “if for any reason there is a change in NZ law which affects how we determine the premium, we have the right to increase our prices”. And as long as we have this protective measure, what incentive is there to gain cost efficiencies and plan for the expected?  

Nah, price hikes are just a matter of recouping losses and standing behind the cloak of the ISI.

In July 2008 Pinnacle Life launched a policy called ‘Funeral Cover’.

Whilst the product is designed essentially for people over 50 (and many insurers call it ’50 Plus Insurance’) it’s available online to anyone aged 30 to 69.

What surprised us is the proportion of people in their 30’s and 40’s that have purchased Funeral Cover - clearly the product’s hitting the mark with Generation C… so to speak!

How does it work?

The entire application process takes around 5 minutes… after which you’ll have a policy covering your funeral for $5k, $10k, $15k or $20k. And the premiums offered for these cover amounts and for this type of product are the lowest in NZ. 

Best of all, being a ‘guaranteed issue’ product, Funeral Cover is offered with no health questions asked, and the policy is emailed to you immediately online.

And not only do the premiums stay the same every year, but once you turn 85, you totally stop paying – and your cover continues free of charge until you, ahem, expire.

And the extra bonus?

Your family will say great things about you at your funeral. See these ads from YouTube…

http://www.youtube.com/watch?v=V4FHeVWjGrc

http://www.youtube.com/watch?v=Nw0s4C0g5SM

 (It’s ironic that this latter video was the last advertisement directed by a popular Malaysian movie director, Yasmin Ahmad, who died soon afterwards of a stroke aged just 51…)