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What's the impact on consumers of the proposed tax changes for life insurance companies?

Ok, this is a boring read (I admit it ok?) – but important for you (the consumer) to note if you are in the market for life insurance in future.

Background

In 1990, New Zealand enacted new tax rules for life insurance products. Consequently, life insurance companies today are taxed at a lower rate compared with other companies. The proposed tax changes are ostensibly to ‘remedy’ this situation.

Proposed tax changes

The NZ government is proposing to change the basis for taxing life insurance companies. Click here to read the government’s discussion document which proposes that new tax rules will fully apply to all new life insurance policies taken out from 1 April 2009. The government has called for submissions from interested parties, closing 12 Feb 2008, so there’s still a chance that further changes to the proposal will be made.

My assessment

With only 4 mil people and around 15 life insurers (if you include the banks), the life insurance industry in NZ is very, very competitive. Over the past 17 years, insurance companies have continually reduced their life insurance premiums to stay competitive. So, whilst life insurers may have started off with higher profit margins when the 1990 tax rules were introduced, today (17 years later) profit margins would have normalised and the tax advantage the industry once enjoyed is basically ‘factored into’ the price of life insurance.

What does this mean for consumers?

It means that today, the consumer is benefiting from the advantageous taxation laws for life insurance – not the life insurance companies. And whilst increasing tax on life insurance certainly sounds like the right thing to do, it will most likely result in unsustainable margins for life insurers, who will have no option but to pass this taxation change on to the consumer in the form of higher life insurance premiums.

So, in a nutshell...

If the taxation laws are changed along the lines currently proposed by the NZ government, consumers should expect an increase in life insurance premiums in future.

How much will life insurance premiums increase? I'd expect the current proposal to drive up premiums by 15%. But let’s not get ahead of ourselves - we’ll just have to wait and see the extent of the tax changes the NZ government pushes through.

Call this a ‘heads up’.

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