Insurance: GST triple whammy

The Government claimed the cost of goods and services will rise around 
6.6 per cent. Some of the media pundits are now arguing it might be as high 
as eight per cent. But whether you take these figures seriously or just 
expect a flat 10 percent increase in prices following the introduction of 
the GST next July, you might be in for a shock.

According to the advice from one insurance underwriting outfit, the cost of 
insuring your home could rise by around 18 per cent!

This is how it works:

When you take out home building insurance, the amount insured (and hence 
the premium) is based on the replacement cost (e.g. if the building were 
burnt down).

Take, for example, a home insured for $200,000 replacement (building only) 
which presently costs $350 for 12 months cover.

The Institute of Consulting Valuers in NSW has estimated that building 
costs will rise by approximately eight per cent as a consequence of the 
GST. (It is not the full 10 per cent because of the abolition of wholesale 
sales tax on some items.)

That is the replacement cost will rise by eight per cent due to GST inputs.

To cover this (and look after their profits) the insurance companies will 
raise the insurance premium (amount paid on the policy) by around five per 
cent.

But that is not all. They will then add another five per cent to the 
estimated replacement cost (much of it induced by the GST) to cover the 
cost of inflation. This is incorporated into the cost of the policy.

When that's done, then you can pay your 10 per cent GST on the new inflated 
premium.

So next year, don't be surprised if the cost of a $350 policy is around the 
$415 mark.