Illogical statements cloud income protection debate
AIA’s General Manager for New Zealand, Bernard McCrea declared as “Illogical” claims that policyholders may be put at risk of tax penalties by their stand on the tax treatment of Agreed Value disability income insurance.
Wednesday, July 21st 2004, 10:25AM
by Russell Hutchinson
McCrea says he agrees with Sovereign on the content of the 1994 policy statement, but notes that it is open to differing interpretations. Room for doubt is created.
There is a requirement of the ruling that in order to qualify for tax deduction, and for the benefit to be deemed assessable, the claim amount must be related to income. McCrea says that while the claim amount is “not paid according to income” it is “assessed in relation to income” as a result of the initial assessment process at underwriting which fixes the allowed benefit.
“That’s what we’ve asked the IRD to clarify” says McCrea “and have been asking them for three and a half years” he said.
Then citing the contrasting examples of a person that suffers a claim immediately after being underwritten and a person that suffers a claim many years after being underwritten. The issue of the timing of claim payment after the assessment of allowed benefit during underwriting is not addressed by the IRD.
McCrea says that there is no risk to policyholders seeking deduction of their insurance premiums – each individual applies to the IRD and his or her deduction will be granted or not. McCrea feels the greater risk is otherwise borne by the policyholder: if they are insured for only 55% of income under current interpretations, and benefits are subsequently deemed to be assessable then substantial underinsurance will occur. In such a circumstance the insured will have no course of action open to resolve the matter.
The IRD is of course indifferent to the level of cover offered by insurers – it is insurers that are interested in the tax treatment of the benefit because they wish to prevent over insurance.
AIA would appear to run a risk in seeking an opinion that the IRD may clarify the ruling – choosing the interpretation Sovereign holds. Would this embarrass them? They claim merely to be unsure of IRD interpretation and similarly hold a different set of assumptions about the risks borne by policy holders based on those views – and so they have asked for a clarification.
Of course what then actually happens at claims time vis-à-vis tax is subject to many different interpretations. Industry sources say they would be generally pleased with a ruling that benefits were not assessable because claimants have much lower effective tax rates on claim than anticipated and insurers feel that they are therefore over insured. A blanket approach by the industry, it is felt, would therefore help to reduce the levels of over insurance implied by this situation.
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