New tax law promotes insurance as long-term savings instrument

Every cloud has a silver lining’ is a common phrase that is used very often. The Union budget 2012 defines this phrase more precisely. As everyone would agree, the budget was presented amid a difficult economic and political scenario. Even then, it had something for almost everyone.

For the common man, there has been an increase of tax exemption limit on personal tax up to Rs 2 lakh. This would automatically leave more money in the hands of the people. But for the first time in many years, women have not got any special treatment in tax-breaks from the finance minister.

For the life insurance industry, all policies sold from April 1 onwards will have to offer a protection cover of at least 10 times the annual premium payable, up from the existing five-times. If the policies do not meet this rule, then they will not be eligible for tax-benefits under Section 80C and 10 (10D). This means most life insurance companies will have to tweak their endowment and Ulip (unit-linked insurance policies) by April 1 to be able to meet the rule.

For the uninitiated, Section 80C allows tax deduction on select savings and investments, including life insurance premium up to Rs 1 lakh, while Section 10 (10D) allows exemption of tax from the maturity proceeds. On the face of it, consumers would now not be able to get tax benefits for any new insurance policies with lower risk coverage. But what the minister has tried by taking away that facility is pushing Indians towards buying more protection plans for themselves.

With respect to the life insurance sector, the recommendations related to tax exemption under 80C and 10 (10D) as well as increase in service tax would make a significant impact. The service tax on first year premium is proposed to be increased from 10 per cent to 12 per cent for Ulips and term plans, and from 1.5 per cent to 3 per cent of gross premium for traditional policies. This will result in having different amounts for the first-year premium and renewal premium, thus resulting in administrative challenges.

For insurers, this will provide further impetus to our focus on life insurance as a ‘long-term savings and protection’ tool, that has been the key stone of strategy for many of us even prior to the Union budget 2012. It is reasonable to expect that consumers implicitly seek tax-benefits from their life insurance policies, especially on the maturity corpus and bonuses.

It is even more important for consumers to buy policies as per the life stage needs. In a nutshell, consumers would do well to keep in mind the following tips while considering purchase of new life insurance plans:

· Buy safe, systematic and self-completing life insurance policies that have adequate protection element.

· Buy life stage goal-oriented products such as child plans and retirement plans and compliment the same with term cover of at least 8-10 times your annual income.

· Check if the policy you intend to buy is indeed eligible for tax benefits.

(The writer is the director and head of product management and persistency at Max New York Life Insurance)

By V Viswanand,
http://m.mydigitalfc.com/personal-finance/new-tax-law-promotes-insurance-long-term-savings-instrument-156