Commissioner's practice note: COVID-19 (coronavirus) and insurance premium

Purpose

This practice note provides guidance for insurers dealing with issues arising from the novel coronavirus (COVID-19) pandemic.

This practice note will remain in force until the end of the 2020/2021 financial year. An extension will then be considered in consultation with the insurance industry.

Background

Due to the novel coronavirus (COVID-19) pandemic, some insurance policy holders will be experiencing unemployment or financial hardship.

A number of insurers are seeking to offer these policy holders the opportunity to ‘pause’ their premium payment obligations or reduce their level of cover.

Depending on the circumstances of the policy holders we are informed that the ‘pause’ period could be for 3, 6 or even 12 months.

During the ‘pause’ period either reduced premiums or no premiums may be payable, and cover may or may not be in place during the paused period. Before or at the end of the ‘pause’ period, cover may be reinstated with no or limited underwriting or may be reduced with a premium reduction due to hardship.

Life companies

In the ordinary course, relevant ‘paused’ policies would simply be re-started after the pause.

However, due to the complexities of some life companies’ product administration systems, it may be necessary to cancel the existing policy during the period of ‘pause’ and re-issue the policy (with exactly the same terms apart from a possible reduction) after the ‘pause’, or record ‘false’ premium payments, as if premiums had continued to be paid during the ‘pause’.

Under the Duties Act 1997 (‘Act’), the ‘re-issue’ of the life insurance policy after the pause, will generally attract duty as a new policy, being

• 5% of the 1^st year’s premium for a temporary or term life policy; and
• 5% of the 1^st year’s premium for a life insurance rider; and
• $1 plus 20 cents per $2000 sum insured for policies of life insurance, other than a temporary or term insurance policy.

Where the issuing of a new policy following a ‘pause’ is due to the requirements of a life companies administration system the following rules will apply:

For policies of life insurance, other than a temporary or term insurance policy or trauma or disability insurance

• Where the sum insured on the re-issued policy does not exceed the sum insured on the original policy, no additional duty will be payable.
• Where the sum insured on the re-issued policy exceeds the sum insured on the original policy, duty will be payable on the increase in the sum insured except to the extent that the increase is provided for under the terms of the original policy, e.g. by an increase in the CPI.

For group term insurance policies

• Where duty has not been paid on the total of the first year’s premiums that were to be received prior to the pause, duty will be payable on the remainder of the first year’s premiums once they are received.
• Duty will continue to be payable where premiums are received in a following year in respect of each additional life covered by the policy.
• Where the sum insured after the pause exceeds the sum insured prior to the pause, duty will be payable on the 1^st year’s premium for the incremental increase in the sum insured amount only, except to the extent that the increase is provided for under the terms of the original policy, e.g. by an increase in the CPI.

For temporary or term life insurance and life insurance riders

• Where duty has been paid on the total of the first year’s premiums received prior to the pause, no additional duty will be payable.
• Where duty has not been paid on the total of the first year’s premiums that were to be received prior to the pause, duty will be payable on the remainder of the first year’s premiums once they are received.

For all other life insurance

• Duty is payable on these policies on the premium paid to effect the insurance. Where duty has been paid on the total of the premiums received prior to the pause, no additional duty will be payable until further premiums are received.

Refunds

For policies of life insurance, other than a temporary or term insurance policy or trauma or disability insurance, group term insurance policies, temporary or term life insurance and life insurance riders

Where a policy is cancelled during the first year the following rules will apply:

• Where a premium is refunded to a person because the person cancels a policy of life insurance within 30 days after receiving the policy a refund is available under section 246 of the Act and can be offset against the duty payable in the next return period.
• Where a premium is refunded to a person because the person cancels a policy of life insurance outside of 30 days after receiving the policy a pro rata refund will be available.
• Any portion of the premium that is retained by the life company as a premium, or as a fee or charge for the cancellation of the policy will remain liable to duty.  Any amounts refunded can be offset against the duty payable in a return period up to and including the June 2021 return.

For all other life insurance

• Where a policy is cancelled during the first year the same rules apply as the policies of life insurance above.
• Where a policy is cancelled after the first year and the premium is refunded to the person because the person cancels the policy, a pro rata refund will be available. Any portion of the premium that is retained by the life company as a premium, or as a fee or charge for the cancellation of the policy will remain liable to duty.  Any amounts refunded can be offset against the duty payable in the next return.

In cases where there is:

• a reversal of premium payments paid in advance, or
• duty compliance for group insurers may not occur until the time of the next scheme review

any refunds or true-ups calculated at that time can be offset against the duty payable in a return period up to and including the June 2021 return.

Where duty was paid on the expectation that the premium was to be received

If a life company has paid duty on the expectation that a premium or an instalment of a premium was to be received and due to a ‘pause’ the premium or instalment of a premium was not received, the life company is authorised to offset this amount against any other payment required to be made under this Act by the life company in a return period up to and including the June 2021 return.

Should the premium or instalment of the premium subsequently be received, then the appropriate duty should be paid in the next return period.

For duty paid as a result of the recording of ‘false’ premium payments, as a consequence of managing a ‘pause’

Refunds are available and can be offset against the duty payable in a return period up to and including the June 2021 return.

General insurers

Section 238 of the Act provides that a general insurer is entitled to a refund of duty if the general insurer refunds, or there is refunded to the person, the whole or a part of a dutiable premium in respect of the contract of insurance for which duty has been paid.

The refund is the duty paid on the amount of the premium refunded. A general insurer to whom duty is refunded may apply the amount of the refund to offset any other payment required to be made under this Act by the general insurer.

Where a general insurer has paid duty on the expectation that a premium or an instalment of a premium was to be received and due to a ‘pause’ the premium or instalment of a premium was not received, the general insurer is authorised to offset this amount against any other payment required to be made under this Act by the general insurer.

Should the premium or instalment of the premium subsequently be received, then the appropriate duty should be paid in the next return period.

Record keeping

An insurer will be required to keep sufficient records to substantiate any refund or offset due to a policy being paused. As a minimum, the following records should be kept.

Life companies

• date policy paused or cancelled
• date policy re-issued
• return period where duty refunded or offset

General insurers

• date policy paused or cancelled
• return period where duty refunded or offset

Windfalls

Section 254 of the Act provides that a registered insurer may require a person by whom a premium is payable to the insurer to pay the insurer an amount equal to the duty chargeable.

Under section 20 of the Taxation Administration Act 1996 the Chief Commissioner may refuse to make a refund to a taxpayer if:

(a)  the relevant taxation law provides for the passing on of the tax to another person; and

(b)  the tax sought to be refunded has been passed on to another person; and

(c)  the Chief Commissioner is not satisfied that appropriate arrangements have been made

to pass the tax sought to be refunded on to that other person.

Where a registered insurer has passed on the duty to a policyholder and subsequently claims a refund or offset, it is expected that the duty will be refunded to the policyholder.

Further assistance

For all other issues arising due to COVID-19 and not covered by this practice note, please apply for a special tax arrangement here.