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Tax changes hurt life insurance

The Professional Advisers Association says the proposed changes to the taxation of life insurance products will have a negative impact on the industry.

Thursday, May 3rd 2007, 6:58AM
In its submission to the Inland Revenue Department, the PAA says there has been insufficient consultation on the proposals and that, if implemented, they will reduce the take up of life insurance.

It says that if there is any additional tax burden placed on life companies this will ultimately be passed onto consumers in the form of increased premiums.

“Our assessment of the proposed changes to taxation for term insurance indicates that premiums for these products will rise by an average of 15%.

“An increase of this magnitude will have significant ramifications for consumers who will become saddled with an increase in life insurance costs. Given the choice between the existing taxation regime and a new regime with increased term insurance pricing, we question whether many consumers would opt for the tax reforms as currently proposed by the IRD.”

The PAA says there maybe a follow on effect to other life products as term life is often the building block for an insurance cover package. The association says that “as many as 75% of all life insurance policies have a combination of benefits i.e. term life insurance plus critical illness, income protection or health insurance.”

“By increasing the cost of term life insurance, the viability of not just term life insurance policies but entire life insurance programmes are being put at risk.”

The PAA argues the proposed changes will exacerbate New Zealand’s under-insurance problem, partly because other industry changes are likely to see around 15% of advisers leave the industry.

"Given the direct relationship between adviser numbers and volumes of life insurance sold, the industry is under marked pressure to maintain, let alone improve, the existing low level of life insurance ownership in New Zealand."

Against this backdrop, the proposed changes to taxation of term life products, and the associated increase in premiums, is a most unfavourable situation. We anticipate the consequence of this situation being:

  • Fewer consumers able to afford to purchase new term insurance thus reducing volume in the industry.
  • Increased discontinuances of existing term life policies.
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