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.

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…?

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.

Ok, it’s travel insurance not life insurance.

But when insurance companies pull out the old ‘weasel clauses’ to get off paying what should be a legitimate claim, it gives all insurance companies (including life insurance) a bad name.

I’m doing a lot of travelling around the world lately and on a recent flight from South Aftrica to London, someone in “luggage handling” prised open my bag, went through my belongings and stole my camera.

Ok. No problem. Isn’t this the reason that I took out travel insurance with Travelsure??

But alas… my claim was rejected because I did not report the theft to the police in London within 24 hours as stated in the policy – I was referred to the small print on page 13 and also somewhere on page 17.

How stupid I was not to open my bag and check what was missing right there on the floor next to the luggage carousel. And never mind that I didn’t notice the camera was stolen… because the thieves left the camera bag… which I opened only 72 hours later.

You see, with Travelsure, ‘reasonable circumstances’ that mitigated against my notifying the authorities within 24 hours are irrelevant.

It seems that Travelsure couldn’t wait to dig out the weasel clauses and do away with my claim! Seriously efficient they are… my claim was rejected in 5 minutes.

“That’s insurance for you” – people will say. ‘No latitude’… ‘no discretion’… ‘no allowance for the circumstances of each case’… ‘quick to take your money’… but full of excuses when you have a claim…

So how about this tagline then?…

Travelsure…. taking the sure out of travel…

November 17 to 23 is Diabetes NZ Awareness & Appeal Week. 

Diabetes is the result of the body not creating enough insulin to keep blood glucose levels in the normal range. It cannot presently be cured but it can be controlled and you can lead a full and active life.  

So what’s the link between diabetes and life insurance you may well ask? Well… plenty!  

Anyone who is unfortunate enough to have diabetes that’s tried to get life cover would know that it’s neigh on impossible to get. It is not just that the risks are high for insuring someone with diabetes, but it is almost impossible to calculate the mortality risk of someone who has diabetes.  

Translating this into plain English… insurers can’t offer a price for life cover because they can’t predict how the disease is likely to affect the sufferer’s lifespan. All they know is that in all probability, a person suffering diabetes is likely to die earlier than the average of the population… not necessarily from the disease itself, but from a range of complications and side effects that can be fatal… such as heart problems and neuromuscular problems.  

There are three types of diabetes which you can read more about on Diabetes NZ website.

According to Mike Smith, president of Diabetes NZ;

“There are now over 157,000 people diagnosed with diabetes in New Zealand. Of these, 142,000 have Type 2 diabetes and it is estimated there are 80,000 who also have Type 2 diabetes and have not yet been diagnosed and a further 400,000, with elevated blood glucose levels, who are at risk.”

“The figures for Type 1 diabetes are also rising at an alarming rate. Currently there are 15,000 diagnosed and around 10,000 of these are young people. Some research states this is increasing by at least 5% a year.”