The new life insurance legislation, which was introduced in draft form nearly two years ago, will significantly increase the tax paid by life insurers from July 1.

Current tax rules were set at a time when most life insurance policies included both risk and savings components. While the industry shifted to term life policies (with no savings component) in the late 1990's, the legislation remained the same, arguably leaving the new type of life policies under-taxed.

The tax changes are expected to reduce profits across the insurance industry as a whole by as much as $75 million per year.

Sovereign today confirmed its intent to limit the impact on policy holders and said adviser up front commissions for term life insurance YRT will be cut from 230% to 200% and accidental death and level term will be cut from 87.5% to 75%.

Sovereign will also absorb some of the impact of the increases taking a $5 million hit a year.

Sovereign chief executive Charles Anderson says the tax impact on premiums could have been upwards of 30%, but it has mitigated that for its customers by passing on half of the potential increase at 15%.

"For a typical customer with $300,000 in life cover, the changes will equate to approximately $3 a month."

Bay Insurance Brokers adviser Simon Beaton says Sovereign term life commission was one of the highest in the industry and that even with the cut it's paying higher than a lot of companies.

Phil Jones Insurance Services director Phil Jones says for years insurance companies have had a preferential tax regime.

"Now it's caught up with them and they expect everyone else to pay for their previous advantages."

Anderson however, says the taxation treatment allowed Sovereign to pay higher commissions and he believes advisers have had the benefit of lower taxation as much as the company has.

He says the challenge for all life insurance providers is to ensure that no one group is unfairly disadvantaged.

"It would be unreasonable for one party alone to bear the cost."

He says there is potentially an affordability issue for the public with premium increases and the New Zealand public is already under-insured which is why it tried to reduce the premium increase impact.

Jones says that if Sovereign's reaction to impending tax changes is more adverse than others, then logically brokers will direct new business to other companies.

However, Anderson believes the commissions Sovereign is paying are neither the largest nor lowest so given its high claim rating, its service and premiums, he is expecting the company to be positively positioned because of the balance it has looked to achieve.

"As industry leader we are better placed than most to absorb the cost of the life tax changes and have carefully considered how to do this while maintaining our competitiveness, stability and superior A+ claims rating."

Anderson says consumers, will face slightly higher premiums in future, though most existing customers will be protected from the immediate impact by the transitional provisions which allow for most existing term life policies to effectively continue to be taxed under the old rules for up to five years.

He says a small group of about 7000 policy holders will be affected by the changes.

There will be no premium change to disability income protection, living assurance and total permanent disablement policies.