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 Sydney Morning Herald recently reported that a team of scientists at Boston University claimed to be able to predict – with 77 per cent accuracy – which of us will live to 100. (Also see NZ Herald)

The scientists did this by comparing the DNA of more than 1,000 centurions with that of the general population, finding a “genetic signature” that was linked to “exceptional longevity”.

What would happen if at some stage people are able to be “longevity tested”? What would happen if you knew that, failing an accident or a natural disaster, you’re likely to live to be 100?

And in particular, how would it affect your application for life insurance???

Standard life insurance premiums are based on the expectation that your lifespan will be that of the average person… in New Zealand that’s 82.2years if you’re female and 78.0years if you’re male. When you apply for life insurance, the insurer will ask you a range of questions to assess if you’re likely to die earlier than an “average” person of your age and gender.  If you are, you’ll be charged higher (loaded) premiums.

But Life Insurance companies typically don’t have processes to check if you’re likely to live longer than average… with a view to reducing your premiums.

So if you turned up at an insurance company with a favourable DNA test, you’d still pay the ‘standard’ rate.

Not fair, is it?

Pinnacle Life received notification of a complaint recently that was made to the Advertising Standards Authority.

The complainant (Tom of Auckland) took issue with Pinnacle Life’s assertion that Pinnacle’s 20% lower premiums are due to the fact that they operate “more efficiently” than the other insurers.

Tom’s complaint was based on his view that Pinnacle Life’s lower premiums have little to do with better efficiency, and instead, provided these two reasons for Pinnacle’s lower premiums…

• Pinnacle Life pay little if any commission to brokers to provide advice to clients…  so they save on commission costs and
• Pinnacle Life doesn’t underwrite people applying for life insurance… it relies on the work done by previous life insurers, thus avoiding significant costs.

Both of these points are, of course, nonsense…

Let me explain.

• Firstly, Pinnacle Life spends proportionally more on advertising, so commission costs are simply replaced with increased promotional costs.
• Secondly, Pinnacle Life underwrite every application received. Any suggestion that Pinnacle Life doesn’t undertake its own underwriting is simply a myth.
• Finally, here’s why Pinnacle Life’s premiums are the lowest in the industry… over 60% of policies are issued without touching a human hand (other than the insured person), and without filing a single piece of paper. It’s called ‘efficiency’ Tom.

Unsurprisingly, the Advertising Standards Authority rejected Tom’s complaint.

Being obsessed with soccer and life insurance, it was inevitable that I would blog some of the perils of being associated with a football mad spouse, or being caught up in a football debate. For the record, the FIFA world cup 2010 official body count stands at 79. Here are some of the events that lead to these fatalities.

• A Thai gunman shot and killed two of his countrymen when they make a racket at Italy’s first goal in the Italy  – Ghana game.
• In Ecuador, a soccer fan was terrified by his own power committed suicide after he correctly predicted that Ecuador would lose to Poland.
• Six deaths reported in Haiti, where two armed gangs battled over an electrical generator needed to watch the World Cup.
• A woman in China died after plummeting from the 17th story of her apartment building last Sunday, after an argument with her boyfriend, who wanted to watch the World Cup in the early morning hours. The boyfriend says she jumped. He swears
• An 18 year old Parisian reveller died after he fell off the top of a subway car he was riding.
• A 20 year old French woman from Lens died when her car crashed, as she leaned out the window in celebration.
• And a man is feared drowned in Lyon after he jumped off a bridge into the River Saone with a group of friends.
• Eleven Chinese people have died of what is now being called “World Cup Syndrome,” which consists of watching a match and keeling over and dying, usually of a heart attack. China remains the nation with the most World Cup deaths, all the more strange since the Chinese team did not even qualify.
• The deadliest event of the entire cup took place in Burundi, where seven people died after police hurled a grenade and opened fire into a crowd of celebrants who were setting off fireworks.
• In Thailand, yet another fan expired of heart failure while watching the final.
• And in Montpelier, the fifth French World Cup death was reported, when a young man was stabbed in the neck during an outdoor viewing of the France-South Africa game.
• In Italy, a 77 year old man fell while trying to attach a flag to a pole prior to the final game.
• A 30 year old member of the Italian crime gang Camorra was shot to death by a rival gang member’s riding motorbikes, as he came out of hiding to celebrate.

Without doubt, the number one killer during the World Cup is heart attacks, followed by murder, with over-zealous revellers (PC for intoxicated fans) a close second or third.

The only good news in all this, is that all the fatalities mentioned above, are insurable events.

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…

PINNACLE LIFE today claimed another first in NZ… Cancer Cover… now available as a fully underwritten product instantly online.

Cancer Cover, as explained in this Stuff article, is a straightforward insurance policy that pays a cash lump sum if the insured person is diagnosed with cancer… simple as that!

With the purchase of a Cancer Cover policy, Pinnacle Life will donate the first three monthly payments to either the NZ Breast Cancer Foundation or the Prostate Cancer Foundation of NZ (depending on the gender of the person covered by the policy).

Cover up to $250,000 can be purchased immediately online, without a medical.

The policy is applied for and issued online in the same way that existing Life, Mortgage and Funeral products are offered on the PINNACLE LIFE website. The buying process from application to policy issue is fully automated using advanced electronic underwriting software developed by Intelligent Life Limited.  The on-line underwriting is supported by reinsurance giant Hannover Life Re of Australasia.

The entire application process takes less than 10 minutes after which applicants can see a draft version of their personalised policy document before committing themselves.  On payment, consumers are emailed their policy document instantly.

Whilst Cancer Cover is designed essentially for the under-45 consumer, it is available online to anyone aged 20 to 59.

Buying Cancer Cover is now as straightforward as buying an airline ticket… maybe even easier!

Today’s ‘instant serious illness cover’ follows the launch of instant Life Cover, instant Mortgage Cover and instant Funeral Cover by PINNACLE LIFE over the past 18 months.

See also Stuff article here.

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.