Last night on TV3’s Campbell Live, the host got stuck into Sovereign Insurance over their refusal to pay out a claim. You can also read about this story on Good Returns and on the Chatswood Consulting Blog.

In brief, this is what happened…

A man in his late 40’s who had taken out a life insurance policy with AMP when aged just 18, decided around two years ago to switch his policy to Sovereign.  In doing so, he was asked several questions about his health in Sovereign’s application form to which the man apparently did not reply with all the facts. Based on this information, Sovereign replaced his AMP policy with a Sovereign policy.  Two short years later and… Houston… we have a problem. The man contracts Cancer and claims on his insurance.

On looking into the circumstance of the claim (as Sovereign is obliged to do when a policy holder claims so soon after taking out the policy) Sovereign discovered that the man did not disclose certain key facts regarding his medical history, in relation to specific questions that were asked.   

So Sovereign cancelled the policy and refused to pay the claim.

This is a tragic situation. The man is terminally ill and is not expected to see out Christmas. To make matters worse, he and his partner are destitute (according to the reports) and the bottom has now fallen out of their life insurance cover. 

The media have taken a perspective on this story that Sovereign are at fault. They’re saying Sovereign should have looked into the man’s medical history before offering the policy. They are also saying that because the omissions that the man made relate to medical history unrelated to Cancer, there is no reason not to pay.  

As depressing as this story is, and based on the facts that have been reported, Sovereign have acted correctly in regard to this case.  And at the same time, there is a massive learning point that should be highlighted for people buying life insurance. Let me explain…

Why the claim was declined.

A life insurance policy is not a right, or a guarantee. It’s a contract between parties.  In this case, had the man disclosed his medical history, Sovereign are unlikely to have offered to replace his policy and the man would have remained covered with AMP. By all accounts, the man misled the insurance company in order to get the policy.  My understanding is that Sovereign voided the man’s policy. This doesn’t mean Sovereign have declined to pay the claim… it means they are treating the policy as if it had never existed, because in their view it should not have existed.

What do we learn from this?

People buying life insurance are entering into a good faith contract. It’s their responsibility to answer all questions correctly on their insurance application so the underwriter can assess the risk and make a fair offer. It’s not the insurer’s responsibility to dig out information and double check all the facts when you make a declaration. The insurance company takes you at your word and then makes you an offer in good faith. If you’ve disclosed fully on your application, you have nothing to be concerned about, your claim will be honoured.

When in doubt… disclose…      

Received this question from a policy holder regarding the Swine Flu pandemic and Life Insurance…

Hi Ed,

Both, my wife and I have signed a life insurance with Pinnacle some time last year to cater for each other and our little daughter.

We were wondering if your policy does have some exit condition that prevents you from paying out the agreed sum in case of a death that has been caused by a pandemic. Can you please provide some clarification on this?

Also important to note [it] might be the fact that with H1N1 looming around the corner you are likely to receive more claims on average than you expected in normal circumstances. How does this affect the insurance business in general? Is the possibility that insurances might not be able to pay out any more claims at some stage because they have been receiving too many claims for pandemic (or big natural disaster) reasons?

Strange questions I know, but you have to ask your life insurer this kind of stuff. Don’t you?

Cheers, [Name withheld]

Good question, no?

Life insurers exist to pay your claim if you die.

Pinnacle Life has no ‘exit clause’ if you succumb to H1N1 or any other type of flu for that matter.  So if you die from H1N1, you’re covered.

Life Insurers generally have their policies backed by large reinsurers who are big enough and diverse enough to withstand pandemics such as H1N1.

In this respect, Pinnacle Life is Reinsured with Hannover Life Re, one of the largest reinsurers of life insurance in the world.

Still, we hope you don’t get Swine Flu… we hear it knocks you around, although only a small percentage of people are actually knocked out.

We recently presented the Pinnacle Life online solution to a large New Zealand corporate that was looking at alternatives to their current group life scheme they have in place.

The question was asked if there were any tax advantages to be gained by the company or the employees with a different form or category of contribution. We provided the following summation in response to the question posed:

Life Insurance contributions by a company are liable for FBT when;

·         an insurance policy where an employer takes it out for an employee and pays the premiums

·         an insurance policy of a life insurance agent or their family, where there is a discounted premium.

Life Insurance contributions by a company are not liable for FBT when

·          an insurance policy where an employee or family member takes it out and the employer pays the premiums – in this case, the payments are taxable income in the hands of the employee.

·         an insurance policy where an employer takes it out for an employee, pays the premiums and gains the benefit from the policy (the company or employer is the beneficiary of the product). In this case, the payments are not subject to fringe benefit tax, and are not taxable in the hands of the employee

In simple words, a group scheme policy where the company pays the premiums and the employee gets the pay-out in the event of death is taxed as an employee fringe benefit rate. 

In the event that an employee takes out a policy, and the employer then pays the premiums, payments are not subject to FBT, but the premium payment is treated as taxable income for the employee.

Where the company pays the premium, and is the beneficiary of the policy (often is the case for key man insurance) payments are not subject to FBT and are not taxable.

 Source:    

http://www.ird.govt.nz/fbt/categories/employer-contributions/fbt-fundsinsurancesuper-liableinsurance.html