Where there are changes to life insurance policies due to financial distress to customers caused by coronavirus, the State Revenue Office has confirmed how it will apply the grandfathering rules for policies obtained before 2014.
There are four specific circumstances related to this issue:
1. Pausing premiums (also known as ’premium suspension’), reduction of premium and/or level of cover
Pausing of premiums means a customer is provided a short period of payment relief until they are able to financially recover and recommence payment.
Reduction of a premium and/or level of cover involves a customer making a hardship application to reduce the premium and/or the level of cover for a period of time. This may then involve reinstatement to the original or a reduced premium and/or level of cover.
The State Revenue Office will consider that the grandfathering rules for pre-2014 life insurance policies will continue to apply when an insurance policy is reinstated, even if technically this process could be considered to involve entering into a new policy. However, the grandfathering rules can only apply if the following conditions are met:
- Pausing or reducing the premium, and/or reducing the level of cover, has only occurred due to the coronavirus pandemic.
- When the policy is reinstated, the level of cover provided does not exceed that under the pre-pause policy.
- If the process involves cancelling and issuing a new policy, the terms of the new policy are the same and the level of cover does not exceed that under the pre-pause policy. In short, this process cannot be used to move customers to an updated policy or higher level of cover.
2. Premium deferral
Premium deferral allows a policy to continue on-foot but with the deferral of the premium for a short period of time.
The State Revenue Office will accept that in these circumstances the original policy remains on-foot and there is no break in its continuation. As such, the grandfathering rules for pre-2014 policies will continue to apply once deferral ceases as long as there is no material change to the policy, such as value of the premium or level of cover.
3. Administrative cancellation of a policy due to system inflexibility
Due to administrative system inflexibility there may be circumstances where, as a result of the pause or suspension of a policy, the insurer will have to cancel an existing policy and re-issue it after the period of pause or suspension.
The State Revenue Office will accept that, notwithstanding that an existing life insurance policy has technically been cancelled and a new one issued, the grandfathering rules for pre-2014 policies will continue to apply. However, this position will only apply in circumstances where the reasons for the change are related to coronavirus hardship relief and the terms of the new policy are the same and the level of cover does not exceed that of the pre-existing policy. In short, this process cannot be used to move customers to an updated policy or one with a higher level of cover.
4. Permission to ‘offset’ duty in place of a formal refund application
Where a premium for an insurance policy has been paid in advance, but the policy is subsequently cancelled, life insurers have sought allowance to offset the duty paid in relation to the cancelled policy against future duty liabilities at a time of administrative convenience to the insurer.
Specifically, this applies to duty paid in respect of:
- Premiums refunded to a customer experiencing hardship due to the coronavirus pandemic.
- Premiums that, although never paid, the insurance company has had to record as having been paid (known as a ‘false premium’) during a period of pause due to the inflexibility of the administration system to ensure continuity of the policy.
- Premiums that were anticipated to be paid but were not paid.
The State Revenue Office will allow, only in the circumstances set out above, the duty component to be offset by the life insurer for a duty liability incurred up until 30 June 2021. This will provide life insurers with an appropriate timeframe to offset the duty component. If there are circumstances where there is duty to be refunded to the insurer beyond 30 June 2021, a refund application for the remaining duty needs to be made with the State Revenue Office. The duty offset option will not be applicable in any other circumstance.
Windfall gain provisions
A refund of duty will be paid to an insurer on behalf of a customer where the insurer undertakes to reimburse the customer for that duty within 90 days of receiving the refund. The insurer must notify the State Revenue Office in writing within seven days of reimbursing the customer.
If the State Revenue Office is not satisfied that the insurer will reimburse the customer, the refund will not be paid to the insurer. The above is in accordance with the windfall gain provisions set out in section 22 of the Taxation Administration Act 1997.
An insurer is required to keep sufficient records to substantiate changes to policies, offsets and refunds in accordance with the above.
If an insurer wants the State Revenue Office to provide specific advice about a particular circumstance or matter, a private ruling can be sought. Find out more about the private ruling process in GEN-009v3.