With the finance minister increasing service tax from 10.3 per cent to 12.3 per cent, insurance premiums are slated to rise for policyholders. However, the treatment will be different for various kinds of schemes, because of the savings component.
For buyers as well as existing policyholders of traditional plans, like money-back and endowment, the rise in cost will have to be paid upfront. This is because there is a savings component in these plans.
Since the mortality and charges components of an insurance product attract service tax, it clearly indicates the traditional plans will get more expensive. This is because mortality forms the largest part of a protection plan. The rise in taxes on a premium of Rs 5,000 will be from 1.54 per cent to 2.06 per cent, or around Rs 30.
"This increase may sound nominal for a younger individual. But, people in the higher age group will get affected, since their mortality charges are high and, hence, they will also attract higher tax," said Chandan Khasnobis, appointed actuary, IndiaFirst life insurance.
In a term plan, since there is no savings component, there will be a rise of two per cent, or Rs 103, in case the premium paid is Rs 5,000.
The revised norms will be applicable from April 1.
On the other hand, in case of unit-linked insurance plans (Ulips), the additional cost will get deducted from the premiums paid. This implies the investible amount will fall, resulting in lower returns, because the number of units one can purchase will also fall.
In Ulips, the service tax will be applicable on both the mortality and charges, such as fund management, policy administration and premium allocation, among others. This will eventually reduce the investible premium.
"After all the charges (now taxable at 12.3 per cent) are deducted from the premium, the investible premium may shrink. If the markets peak during the fund's maturity, individuals may make good the money spent on higher taxes," says R R Dash, zonal manager, Life insurance Corporation of India.
In the case of Ulips, for individuals, the taxes payable are all included in the premium.
But, experts suggest, one should always buy a pure protection plan and invest the remaining amount in an investment product, never confusing it with insurance.
Apart from the increase in taxes, the Budget has definitely made one positive move by increasing the required sum assured from five to 10 times the premium paid for tax benefits under Section 80C.
This shows they are promoting protection plans more than investment plans. According to experts, most insurance products provide the required sum assured.
"This increase in sum assured is beneficial for the insurers and customers as well. This will help provide long-term contracts and renewals, which help in increasing the protection element and ensure the policyholder gets a higher maturity benefit, too," added Akshay Mehrotra, chief marketing officer, Policybazar.com.