Issues arising from the coronavirus pandemic for life insurers

Policies obtained before 2014

Where there are changes to life insurance policies due to financial distress to customers caused by coronavirus, we have confirmed how we will apply the grandfathering rules. This applies to policies obtained before 2014.

There are 4 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 given a short period of payment relief until they can financially recover and restart 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 reinstating the original or reduced premium and/or level of cover. 

We will continue to apply the grandfathering rules for pre-2014 life insurance policies when an insurance policy is reinstated. This applies even if this process could technically be considered to involve entering into a new policy. However, the grandfathering rules can only apply if the following conditions are met:

1. Pausing or reducing the premium, and/or reducing the level of cover, occurred only due to the COVID-19 coronavirus pandemic.
2. When the policy is reinstated, the level of cover provided does not exceed that under the pre-pause policy.
3. 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. 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 while the insurer defers the premium for a short period of time.

In these circumstances, we will accept that the original policy remains on foot and there is no break in its continuation. As such, the grandfathering rules for pre-2014 policies continue to apply once deferral ceases provided there is no material change to the policy, such as to the 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, due to the pause or suspension of a policy, the insurer must cancel an existing policy and re-issue it after the period of pause or suspension.

We will accept that the grandfathering rules for pre-2014 policies continue to apply. This applies even where an existing life insurance policy has technically been cancelled and a new one issued. However, this position will only apply where the change is related to COVID-19 coronavirus hardship relief, 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 when it is convenient to the insurer.

Specifically, this applies to duty paid in respect of:

1. Premiums refunded to a customer experiencing hardship due to the COVID-19 coronavirus pandemic.
2. Premiums that, although were never paid, had to be record by the insurer 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.
3. Premiums that were anticipated to be paid but were not paid.

In the circumstances set out above, we will allow the life insurer to offset the duty component against 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 must be made with us. The duty offset option does not apply in any other circumstance. 

Windfall gain provisions

We will pay a refund of duty 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 us in writing within 7 days of reimbursing the customer.

If we are not satisfied that the insurer will reimburse the customer, we will not pay the refund 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 must keep sufficient records to substantiate changes to policies, offsets and refunds in accordance with the above.

Further advice

If an insurer wants us to provide specific advice about a particular circumstance or matter, they can seek a private ruling. Find out more about the private ruling process in GEN-009v3.