New gender rules - how you will be affected
If you crash your car you know that your motor insurance will go up, or if you smoke that you'll have to cough up more for your life insurance policy.
Whenever we buy insurance, underwriters take into account a huge range of risk factors before setting the price - from our age and state of health when it comes to life and health insurance, to the car we drive and where we park it for motor cover.
However, from 21 December, the way insurers price policies is set to change. Following a European Court of Justice (ECJ) ruling, insurance companies will no longer be able to take applicants' gender into consideration.
That means car insurers will no longer be able to charge young male drivers more than their female friends, even though they're 10 times more likely to have a serious crash. Nor will life insurers be able to charge women less just because they're less likely to die during the term of the policy.
Annuities will be hit too, as men have typically been able to generate a higher income from their pensions because they don't live as long as women.
Whether you think this brings to an end years of discrimination or is European bureaucracy gone mad, the fact remains that once the new rules come into effect many of us will have to stump up more for our insurance.
So who exactly will be affected and is there anything you can do to beat the hikes?
Although all women could see some price increases when they come to renew, The AA says it's young women who are expected to face the biggest jumps. This is because it's in the 17 to 22 age group where there is currently the greatest difference in male and female pricing. "Premiums could rise by up to 25% for young women," explains AA spokesperson Ian Crowder.
However, young women don't necessarily have to swallow such huge increases. One solution could be telematic or ‘pay how you drive' insurance.
This involves having a small device positioned behind your dashboard that monitors your driving - everything from the time of day you drive and the miles you travel, to your speed, cornering, braking and the force of any impact you have, be it with a curb or something more serious.
Armed with this information, insurers are able to offer cover based on your driving, rather than blunt assumptions made on historic claims experience.
Mark Grant, business development director at insurethebox.com, says as long as you're a safe driver, you stand to make sizeable savings. "What we do is rate individuals on their driving behaviour, so if you are a guy who drives like a girl, you'll pay the same rate as a girl."
He adds: "The average saving is £500, but younger drivers are saving around £900." If you don't like the idea of having your driving monitored, the message is don't accept your renewal quote. Shop around to make sure you get the best deal. In some cases, young women whose insurance is coming up for renewal shortly after 21 December could save money by cancelling their existing contract early.
Scott Kelly, head of motor insurance at GoCompare, says: "Any woman with a renewal coming up early in the New Year may well consider trying to lock into a better 12-month deal now." However, he also advises they find out if any cancellation charges apply and to consider the longer-term impact of losing this year's no-claim bonus.
And what about men, can they look forward to cheaper premiums in 2013? Crowder says: "Premiums will fall a little following the ECJ ruling, but not by a lot and certainly not by more than 10%."
LIFE & HEALTH INSURANCE
Trying to accurately predict how much we'll have to pay for protection, such as life or critical insurance, following the changes is a bit like trying to pin the tail on the donkey.
"It's all a guessing game," says Matt Morris, senior policy adviser at LifeSearch. "Either insurers are not being upfront with us or they just don't know. Some people say price rises could be as much as 30%, others say it could average out at more like 15%."
Currently, a healthy woman will typically pay less than a healthy man for life cover - and possibly, depending on her age, for critical illness insurance too. Conversely, men usually pay less for income protection.
Theoretically, this should mean that from 21 December life and critical illness insurance will become more expensive for women, while the cost of income protection for men could rise.
However, it's not that simple, as insurers are facing other changes in addition to the gender rules. From January 2013, insurers will no longer be able to benefit from the ‘I-E' (income minus expenses) regime, which currently allows them to offset some of their tax liability on their trading profi ts on protection business against their investment business.
Both life and critical illness premiums could rise by as much as 10% on the back of this change alone, according to trade body The Actuarial Profession. So, while men should theoretically see premiums fall, this is unlikely to be borne out in reality. "If men do make any savings they'll be small and could be wiped out by the I-E rises," adds Morris.
The run-up to 21 December is the closest thing insurers will have to a ‘Blue Cross Sale' so the message, then, if you have been thinking about taking out any life or health-related insurance, is stop procrastinating and talk to a protection adviser without delay. "Do it now and take advantage while rates are low.
Some insurers are saying they'll honour applications made by 21 December, others are not," says Tony Mudd, divisional director at wealth manager St James's Place. Although simple applications can go through in a matter of weeks, he warns more complex cases take longer.
"Underwriting can take two to three months if there is a particularly high sum assured or a medical history with heart disease or cancer." The only exception is women buying income protection. This policy – which replaces a proportion of your income if illness or injury prevents you from working – will become up to 28% cheaper for women after the changes.
If you already have cover in place, the good news is that because policies aren't annually renewable, you won't be affected by new rules. However, if you want to top-up or amend your cover advisers recommend you do so now before prices rise.
What will happen to the price of your insurance?
|INCOME PROTECTION||UP 20%||DOWN 28%||TERM LIFE COVER||UP 3%||UP 22%|
|CRITICAL ILLNESS WITH LIFE COVER||UP 6%||UP 16%||CAR INSURANCE||DOWN 10% MAX||UP 11 TO 25%*|
Source: Protection quotes from LV= and also include the impact of I-E changes. Car insurance quotes from The AA. All quotes are estimates only.
*Younger women face the largest increase.
A combination of increased life expectancy and poor gilt yields means annuity rates are at an all-time low. This is only set to worsen with the introduction of gender-neutral pricing.
No longer will men be able to generate a higher income just because they're not expected to live as long. "In theory, male rates should come down and female rates should go up," says Laith Kalaf, pensions investment manager at Hargreaves Lansdown. "However, we think the reality is that male rates will come down but female rates won't rise in the short term."
Men who are on the verge of buying an annuity could therefore potentially boost their retirement income ahead of the change. "If you're a man who expects to buy an annuity in the next six to 12 months get on with it now, otherwise you could see your income fall," advises Kalaf. "The consensus opinion is expecting income drops in the region of 5 to 10%," he adds.
Alan Lakey, partner at Highclere Financial Services, says putting off retirement for a short period may not be enough to recoup the losses. "The theory used to be that one year's extra saving would be enough to offset falling rates but that's no longer the case."
Mudd, however, warns retirees not to rush into buying an annuity. "Don't let gender pricing affect the broader issues around your retirement. It has to be right that you want to crystalise your pension and buy an annuity."
For those men who aren't in the position to buy an annuity now the only way to offset the drop in income is to exercise what is known as their ‘open market option' – shopping around for the best income, rather than accepting the deal offered to them by their pension provider. Only one in three people do shop around, according to Which?.
Richard Baddon, insurance partner at Deloitte, says that those people who smoke or who have some health problems such as diabetes or high blood pressure should consider an enhanced annuity provider that offers higher rates of income to less healthy applicants. "Annuity providers estimate between 40 and 60% of people would qualify for an enhanced annuity," he explains.
SHOULD YOU BUY NOW OR WAIT?
- If you are a male and want to buy or top-up life, critical illness cover or income protection.
- If you are female and want to buy or top-up life or critical illness cover.
- If you are a male and will need to buy an annuity in the next six months, it may be worth buying now.
- If you are female and can hold off buying an annuity it may be worth waiting to see if rates rise.
- If you are female and want to buy income protection. Rates could fall.
- If you are male and don’t need an annuity yet, don’t panic. This is one of the biggest financial decisions you will ever make.
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Critical illness insurance
This cover pays out a tax-free lump sum if you become seriously ill. All policies should cover seven core conditions: cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. You must normally survive at least one month after becoming critically ill, before the policy will pay out. Payouts are determined by premiums and premiums are determined by the severity of your illness, the less severe the lower the premiums.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.