Traditional life insurance policies could turn dearer

Your traditional insurance polices with an investment component may cost more as you will have to pay nearly 52 per cent more service tax than what is being paid currently.

Budget 2011-12 has proposed to increase service tax on the investment component of the traditional life insurance policies. At present, normal service tax rate of 10 per cent is applicable to pure term life products while service tax is payable at a gross rate of one per cent of the total premium in case of traditional endowment products.

The Budget proposal, however, will make things different. It has mooted about 52 basis points increase in tax from 1.03 per cent to 1.55 per cent.

In effect this means that a policyholder will have to pay a little more than half of what is being paid now, point out experts.

The Unit Linked Insurance Policies (ULIPs), too, will be more expensive as the portion of premium other than what is allocated for investment would also be charged.

Insurance companies are ‘surprised' about the proposed hike in service tax. “Although the increase is marginal, this is not in line with our request for fiscally supporting, long-term savings contracts such as life insurance,” Mr Rajesh Sud, CEO and Managing Director, Max New York Life Insurance Co. Ltd, told Business Line.

About 65 per cent of funds in traditional policies are mandatorily invested in government securities and infrastructure bonds, and thereby giving a fixed benefit to policyholders.

“While we still need to examine the proposal in detail, if this is the intent, then the proposed service tax will make traditional policies costly for policyholders,” Mr T. R. Ramachandran, CEO and MD, Aviva India, said.

Impact

The move has come when the share of traditional insurance products has been increasing in the market. ULIPs, which had over 65 per cent share before September 2010, started declining after introduction of new norms by the Insurance Regulatory and Development Authority (IRDA).

According to sources, IRDA is examining the impact of the increase in service tax on the industry.