The
service tax on life insurance plans will go up w.e.f. 1st June 2015.
The new service tax rate will be 14% (old rate – 12.36%) for term insurance and
for traditional plans it will be 3.50% (old rate 3%) for the first year and
1.75% (old rate 1.50%) for subsequent years. These increases in service tax
will increase the premium and also surely reduce the overall return in the
traditional plans. Traditional plans are a combination of insurance cover and saving
element coupled with tax benefit. The entire debate after Modi government
completed one year was around growth and development but nobody noticed that
this minor change can affect the crores of policy holders. Hike in service tax
is a major blow to common man as it will not only increase their insurance
premium but also increase mobile bills other services.
Traditional
insurance plans are sold heavily historically since LIC came into existence.
Previously only LIC was pushing for these products but now private insurance
companies have also aggressively launched many traditional plans in last few
years. Traditional plans are very easy to sell as they are not complex as
compare to ULIPs. The traditional insurance plans neither are insurance plans
in proper meaning of the term as they offer very limited sum assured against
the premium paid nor are they investment products, as they are unlikely to beat
the inflation.
We
need to agree that insurance distribution is agents driven. The agents sell
only those products where they earn more commission. Agents are promoting
traditional plans heavily because traditional plans pay around 35% commission
in the 1st year and 5% renewal commission thereafter till the
premiums are paid. IRDA is silent and
not taking any steps to reduce charges in traditional plans. This hidden
charges and increasing service tax will surely make traditional life insurance
plans investor unfriendly.
The
service tax journey started from 1% and has now increased to 3.50% in just 4
years time. Now June onwards you have to pay more premiums because of the hike
in service tax. I strongly feel that the annual returns on the traditional
plans will come down to below 6% p.a. It is much better to take a term plan and
invest balance in PPF as PPF also gives tax benefit and maturity is also tax
free. This combination of term and PPF will give at least 2% more return
compare to traditional plans.
The
other option for investment can be conservative MIP Funds as many people invest
more than Rs. 1.50 lakhs p.a. in life insurance products. Traditional plans are
debt oriented plans as substantial investment of around 85% is done in
government and corporate bonds and only 15% is invested in equity. This
combination of heavy debt and defensive equity is like mutual fund’s Monthly
Income Plans (MIP) which score better due to low cost. You can expect around
10% average tax free return from MIP plans of mutual funds. The lack of
awareness and advice available in the market is responsible for this. Every
year crores of rupees are spent on investor education but the result still is
not encouraging.
Let
us understand the returns difference with the concrete example. Suppose a 30
year Male wants to buy a traditional endowment plan of Rs. 10 lakhs sum assured
for a 20 year term. The annual premium for him will be around Rs. 50,000
assuming he is healthy and does not smoke. The premium for him will be added
with service tax applicable. So his premium for 1st year will be Rs.
51,750/- And Rs. 50,875/- Second year onwards till end. The bonus rate for
endowment plan is around Rs. 45 per thousand. Assuming this will remain same
till next 20 years the maturity value will be around Rs. 19 lakhs giving return
of 5.62% p.a.
If
you invest Rs. 48,000 in PPF after buying term plan of Rs. 10lakhs the maturity
amount will be around Rs. 22 lakhs assuming return of around 8.00% p.a. If you
invest the same amount in MIP funds the corpus will be around Rs. 27.50 lakhs
assuming return of around 10.00% p.a. PPF and MIP funds will give you more even
in case you die within the term. The another advantage of term plan is that it
will never lapse as the premium will be around Rs. 2,000 p.a. which you still be
able to pay in bad days.
It
is difficult to tax foreign entity in India and easy to pass the burden to
common man. The Finance minister has abolished the Wealth Tax and did not
hesitate to increase the service tax which affects the common man. Cover offered under Pradhan Mantri Yojana of
Rs. 2 lakhs both life and accidental death is inadequate for all middle class
family. I strongly feel that service tax on life and health insurance should be
abolished so that people can buy the adequate cover to secure their family.
This article first appeared at indianotes.com
http://www.indianotes.com/Analysis/Service-tax-hike-makes-life-insurance-plans-unviable/195031/2/TI
