Tax breaks only if insurance cover is 10 times annual premium

By Deepak Yohannan
April 19, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Tax exemption under Section 80C is one of the major drivers of insurance sales. In fact, it has become a trend to launch a new variant of single-premium plans in February-March to cater to those who just want to make some investment to avail tax benefits.

Budget 2012 set the cat among the pigeons when it mandated that to be eligible for tax exemptions, the cover provided in the life insurance product should be at least 10 times the annual premium paid. In fact, the recommendation was to make it 20 times the annual premium paid. While this seems to be the obvious thing to do considering it is an “insurance” product, a large number of life insurance plans actually provide cover only up to five times the annual premiums paid — and these are money spinners for insurance companies. The higher this multiple, the higher the insurance company would need to set aside as mortality charges and lesser would be the investment component.

Simple term insurance plans which are the best form of life insurance, and a must for every individual, provide a much higher cover multiple and hence do not get affected by this. A large number of non-term plans like money-back, child, endowment, ULIPs and single-premium plans would be affected by this though. Apart from insurance companies, there are three sets of customers who would also find this unattractive.

1) I just want the tax break — the insurance component is a bonus: It’s closer to the end of the year and I have not yet invested enough for tax purposes. I would rather maximise the investment from it rather than look for cover.

2) I do not have a regular income: I don’t want to be tied down by a policy for which I have to pay for 5 to 10 years. I just want to park some money in a single-premium plan which helps me save tax for the year.

3) I am a senior citizen: At my age, I am not very interested in the cover and there are no dependents. I want to save tax and don’t want large amounts of the premiums I pay to go as mortality charges. I would be better off maximising the returns from it.

Of course, there would be people who fall into overlapping categories of the ones mentioned above.

It’s a tough call, whether to promote the “insurance” component which is actually critical for building a strong country, as the implications are long term and beneficial OR to help people easily save tax. Introducing the tenure of the product is another twist to this, which too has its merits — give tax breaks only for life insurance plans of 10 years and above. The insurance regulator and the industry bodies are best equipped to find the best way forward or at least evolve over time.

So what do you think? Do comment and share your inputs below.

(Write to the author at deepak@myinsuranceclub.com)

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