This section of Sovereign Insider has been designed to explain the unique aspects of the forth-coming Life Tax for “Workplace Insurance”.
This, along with the introduction of the adviser regulation regime will change and shape our industry over the next 12 months.
The comments below are based on Sovereigns interpretation of the relevant Acts as at 20 April 2010.
Background
From 1 July 2010, there will be changes to the way life insurance is taxed that will see all life insurers pay more tax on their life insurance business. This includes Compulsory Workplace schemes that provide life insurance.
Within the legislation, there are provisions that protect existing customers (business issued before 1 July 2010) from the effect of the new tax rules for certain periods of time – this is known as grandparenting.
It is important you understand the changes because there may be an impact to the premiums charged for your member schemes. It is also likely to become more topical in the media and your customers may have questions.
For further information on the grandparenting of these policies click here
Summary of grandparenting rules for Compulsory Group Schemes (Life Cover)
As currently drafted, the grandparenting provisions will apply to workplace insurance as follows:
a) Three year grandparenting:
Schemes in place before 1 July 2010 that are within the definition of a "workplace group policy" in the tax legislation qualify for grandparenting for three years from 1 July 2010, without the need to trace through to underlying members. Grandparenting applies at a scheme level. The entire scheme qualifies for grandparenting, including any new members joining the scheme after 1 July and any cover increases for existing members after that date.
The current definition of a "Workplace group policy" is:
"a life insurance policy with multiple individual’s life insurance cover grouped under it, if:
(a) the group of individuals is a class of employees of an employer, and the employer is the sponsor of the policy, or are members of a union registered under the Employment Relations Act 2000, and the trade union is the sponsor of the policy; and
(b) the general public is excluded: and
(c) where the sponsor is the employer, joining the life insurance policy is compulsory for the relevant class of employees, and the employer must pay the premiums"
We expect some amendments to the definition to be enacted later in the year. These amendments are expected to broaden the definition and increase the number of policies that qualify as workplace group policies.
b) Five year grandparenting:
Lives insured through workplace schemes not meeting the definition of a “workplace group policy” can qualify for grandparenting for five years from 1 July 2010. Typically, these schemes would be Voluntary ones. However, it is necessary to trace through to underlying members and grandparenting is applied at a member level. Any new members joining after 30 June 2010 are not grandparented. Existing members as at 30 June 2010 will also cease to be grandparented if the member's level of cover increases by more than 10% in a year.
Frequently Asked Questions
What does grandparenting mean?
Grandparenting is a term used to describe transitional provisions applying to policies and schemes in-force as at 30 June 2010, effectively applying the current tax rules to those policies until the end of the grandparented period.
Will Sovereign increase member premiums to offset the rise in life tax rates?
It is likely that there will be some impact on premiums for workplace group policies established after 1 July 2010, for those members of existing voluntary workplace group policies who join after 1 July 2010 and for members of voluntary workplace group policies whose cover increases by more than 10% in a year.
Should I expect a change to the level of commission I receive for selling Workplace Compulsory life business once the new tax rates are inforce?
Sovereign has no intention of changing commission levels on Compulsory Business.
Do the new tax rates have any impact on non-life benefits?
No, the new life tax rules will have no impact on non-life benefits.
Is there any impact on rate guarantees for existing schemes?
No. Existing schemes will retain the rate guarantee for the term previously guaranteed with no impact on premium.
Are all Compulsory schemes captured under the new tax regime?
All compulsory schemes with life benefits will be subject to the new tax regime (to the extent of the life insurance cover provided). The timing of the impact will depend on whether the scheme is classified as a "workplace group policy". As mentioned above a "workplace group policy" can be grandparented for three years; where a scheme does not qualify as a “workplace group policy” individual members’ cover may be grandparented for up to five years where certain requirements are met.
Which policies are included in the definition of a “workplace group policy”?
The definition of “workplace group policy” is expected to be extended to include workplace policies that are:
- Group policies offered through superannuation schemes
- Broker-administered pool schemes
- Group policies sponsored by industry associations.
The definition of “workplace group policy” is also expected to be extended to include cover for member’s spouses and voluntary top-ups in cover arranged by members in accordance with the rules of the scheme (pending finalisation of the wording).
Will new members who join existing schemes impact the grandparenting of a scheme?
Grandparenting for schemes which come within the tax legislation definition of a "Workplace group policy" will apply at a scheme level meaning changes made by individual members and new members joining will not impact on the grandparenting of the scheme.
Schemes which fall outside of the "Workplace group policy" definition will be treated similarly to retail policies, with grandparenting applying at a member level – ie new members after 1 July 2010 will not be grandparented, but existing members may be grandparented for five years (subject to certain restrictions).
What is the impact on a Voluntary scheme which operates under a master policy?
Employer voluntary schemes operating under a master policy will not come within the definition of a “workplace group policy”. Grandparenting can apply to these schemes at a member level.
There has been discussion in the media about a potential increase of GST. Is this part of the tax changes affecting the life insurance industry from 1 July 2010?
No. If there is any change to GST, this is separate from the changes to the Life Tax rules. If there are changes to GST, we expect it is unlikely that there would be any change to the GST exempt treatment of life insurance.