I’m a life insurance adviser not a tax adviser!

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[Opinion] Unless you are a tax expert you should not give tax advice.  But does this mean life and health insurance advisers can simply ignore tax when it comes to giving advice?

Thursday, September 19th 2024, 12:09PM 1 Comment

by Steve Wright

Surely life advisers need some basic understanding of the possible associated tax consequences of their recommendations in order to give clients suitable life and health advice?

Shouldn’t likely tax consequences be discussed with the client, where tax is material to advice decisions the client must make? If you don’t address tax with them, have you given them enough information to make informed decisions?

I think all financial advisers should have an understanding of tax basics. Arguably it’s important to understand the general Income Tax distinction between capital and income receipts, the concepts of exempt income and deductions from income.

For family life and health insurance the income tax position seems reasonably settled. For business insurance, the tax issues appear to be more complex.  Income Tax is not the only concern: GST is also a possible consideration for GST registered policyholders and, if you are advising on Employer Group Insurance, Fringe Benefits Tax may be an issue.

I suspect advisers would be required to know when to warn their clients to take tax advice on any recommendation

The problem is that, asking family clients to take tax advice if they query whether a benefit paid on Mum or Dad’s death is taxable, or, on the tax implications of an income protection recommendation, may set them off in search of another adviser.

What if the client doesn’t ask about tax, can we ignore it then?

Again, I think not. Consider for a moment an income protection/mortgage repayment insurance recommendation. Whatever product you recommend, there is likely to be a not insignificant, tax consequence for the client.

Will a failure to deal with these likely tax consequences leave you exposed to a possible complaint, maybe many years down the track, when your financial exposure would have built nicely?

I believe the tax consequences of personal income protection (the Income Tax Act refers to these as ‘personal sickness and accident policies’) has been quite clearly communicated by the IRD.

Sufficiently so in fact, that advisers can surely explain the tax consequences as being ‘generally acknowledged as’ or ‘understood to be’ for simple family protection cases, while never being categoric. I‘m aware some don’t fully agree with the IRD’s interpretation of the tax consequences of certain income protection policies but even so, I don’t expect advisers could be fairly criticised for following the IRD’s stated view.

Various other factors may affect tax issues relative to your recommendation. For example: who the policy owner/s are; what their tax status is; whether they file tax returns or are PAYE only taxpayers, etc.  What if your client is a sole trader? If your client is a business owner, you may have both corporate and natural taxpayers to consider.

Whichever way you deal with it, learning more about the basics of tax will benefit you and your business.

If you are searching for CPD topics to populate your next CPD plan, perhaps ‘the tax basics of life insurance’ would be a good inclusion.

An acceptable understanding of the possible tax consequences of life and health insurance recommendations will put you in a better position to properly advise clients. Naturally you should always do this with the necessary disclaimer that you are not a tax professional and that they may choose to take specialist tax advice to confirm your advice.

In more complicated cases, perhaps strongly suggesting your client takes tax advice may be appropriate.

Finally, I am not a tax adviser, and this opinion piece is not tax advice!

Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.

Tags: Opinion

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