Should low income earners pay more for their life insurance?

Technically, yes!

It is a grim fact that men classified as having ‘low income’ will die on average 6.5 years younger than higher earners.  And for women, this gap is 4.7 years.

This means that low income men and women are at higher risk for life insurance… in the same way that smokers are higher risk for life insurers… and low earners (technically) like smokers should pay more for their life insurance cover.

I started thinking about this issue when a report from Otago University caught my eye.

According to this report, the life expectancy gap between rich and poor in New Zealand is not only significant, it’s widening! Over the 20-year period from 1981 to 2001, life expectancy for high earning men increased by 2.1 years and by 1.4 years for women.

So, do we believe that life insurance companies in New Zealand will at some point introduce a question on the Life Insurance application form along the lines… “How much do you earn?”

Nope, never!  (And nor should we.)

Yet… (believe it or not) it does happen in some countries… South Africa being a case in point.

If you apply for life insurance in South Africa, you will typically be asked to declare both your level of education and monthly income on the application form.  If your level of income and/or education is low, you’ll be quoted a higher price for your life insurance!

Talk about kicking someone when they’re down!  Tough place Africa.

The first ever cancer-only insurance policy in NZ is now available from online provider Pinnacle Life.

What is Cancer Cover?

Cancer Cover is a form of stripped-down trauma insurance.

Whereas trauma insurance typically covers as many as 30 different ailments and is expensive, Cancer Cover focuses on the most significant of these risks, being Cancer. To put this in perspective, over 85% of trauma claims paid out by insurers relate to just three conditions – cancer, heart attack and stroke – and if you break this down further, 80% of these claims relate to cancer.

Cancer Cover is part of Pinnacle Life’s bid to win younger, price-conscious policyholders from the big insurers who dominate in trauma insurance.

Why does Cancer Cover appeal to younger consumers?

Many of the conditions covered and paid for under trauma insurance are related to ageing… such as heart attacks, heart bypass surgery, stroke, arthritis, Alzheimer’s and chronic lung disease. Whilst there is obviously some risk associated with these diseases for any consumer, more and more people in their 20’s and 30’s just don’t see the value in paying to cover these conditions. They see them as extremely low risk.

Any stats to support this?

• Cancer is the leading cause of death in NZ, accounting for 30% of all deaths.
• 1 in 6 people will be diagnosed with cancer between the age of 30 and 64.
• For females the biggest cancer killer is breast cancer. All women have a chance of developing breast cancer at some point in their lives.
• Breast cancer accounts for 17% of all female cancer deaths and around 1 in 9 women in NZ will be diagnosed with breast cancer at some stage in their lives.
• For males, lung cancer is the highest killer – accounting for 21% of male cancer deaths. However, prostate cancer represents the highest incidence of male cancer – 25% of all male cancer cases.
• In 2005 (latest NZ stats that I can find online) there were 18,610 new registrations of cancer in NZ and 7,971 deaths. This means there were almost 11,000 more people living with cancer than the previous year.

Why is cancer different to other ailments such as heart disease?

Cancer doesn’t correlate with age to the same extent that many other ailments do… even the young and the fit are susceptible. Like super-cyclist Lance Armstrong (testicular cancer in his 20’s), Wallaby rugby player Julian Huxley (brain tumour), cancer doesn’t respect how young or healthy you are.  It just happens.

And if you’re unlucky enough to be diagnosed with cancer, the financial consequences can be severe. You may need to take time off work. Or you may need to remodel your lifestyle, or you may need to find cash for to fund cancer treatment or medication.

That’s where Cancer Cover comes in… affordable cover that pays a lump sum if you’re diagnosed with Cancer.

Is Cancer Cover more affordable for younger people?

Pinnacle’s cancer policy pays up to $250,000 if you’re diagnosed with cancer. The specialised scope of the cover can save a bundle in premiums. A 40-year-old non-smoker in good shape with limited history of cancer in the family buying the cancer cover would pay only $19 a month for $100,000 of cover… compared with $37.55 that you’d typically pay for trauma cover in NZ.

You can get cancer Cover online in less than 10 minutes… and if you click here to buy, some extra cover will be thrown in free…

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.

This article appeared in the herald last week about life insurance companies asking people on their life insurance application about their sexual behaviour with prostitutes. The question is typically asked in conjunction with the question about whether or not you may have HIV/AIDS. The article takes a swipe at insurance companies and sensationalises the issue.

Several NZ insurance companies and banks were asked their views on the matter and all defended the practice, as did the CEO of the Investment and Insurance Association (ISI).

So where do we stand on this? Is it reasonable to ask such questions on a life insurance application form or is it an invasion of one’s privacy?

Pinnacle Life handles this issue in a similar way to the other insurance companies.

The purpose of a life insurance application is to ask questions that relate to the risks of selling you a policy. If you do risky things like sky diving or deep scuba diving, you’d be offered a policy with an increased premium.  Likewise if you are in a high-risk occupation like crop spraying. You’ll also pay more if you smoke or if you are morbidly obese. This is absolutely normal for life insurance. And to determine these things, you will be asked the appropriate questions on your application.

So what’s the problem with asking about HIV and about your lifestyle choices that increase your risk of contracting HIV. Sure it’s a sensitive matter for some people, but if you want life insurance, a life insurer needs to know what risks it is being asked to insure.

Until someone comes up with a better suggestion, I think this question will remain.

A question from Janelle…

“Can I ask why you don’t offer a comprehensive product range which includes trauma insurance?  My husband and I have life and trauma insurance.  As I understand it they are linked.  But we can’t move them both over to Pinnacle because you don’t offer trauma insurance so what do you suggest?”

Answer…

Indeed Pinnacle Life does offer a Trauma product.

On the Pinnacle Life website there is a simple Trauma product called ‘Serious Illness Cover’. It covers the ‘big four’ trauma conditions (cancer, stroke, heart attack and heart bypass surgery) that typically account for 90% of all claims.

If you already have an existing policy for life cover and trauma cover you can apply to switch your policy to Pinnacle Life. Pinnacle will attempt to replace it with 20% lower premiums. You can apply online through the Pinnacle Life website. Just go to the product selection screen (second page) and you will see the ‘Switch your policy’ option there.

 Question from Grant

We have a broker who argues the value he offers is when a claim is made. Thankfully we have yet to test this, but I can well imagine that neither my wife nor I would be in the best headspace to submit or let alone argue a claim with an insurance company. How does Pinnacle counter this point?  

Answer

There may be a lot of variability when you submit an accident claim for your car, or a health insurance claim. So maybe if an insurance broker goes in to bat for you it could be helpful in some circumstances.

But for a life insurance claim, it’s relatively straight forward… your are either dead or you are not dead. And ‘dead’ is usually quite easy to prove. All you need is a death certificate and Bob’s your late uncle.   

Given that Pinnacle Life is in the business of life insurance (not car insurance or health insurance) , Pinnacle Life typically doesn’t spend a lot of time haggling over claims.

So, would you better off if you used a broker to submit your claim? Personally I don’t see the point.