As the tax-planning season draws near, insurance companies are planning to launch a series of single-premium unit-linked insurance plans (Ulips) and are aggressively selling their existing ones too. These are products where the policyholder pays the premium just once during the policy term and he or she gets the cover throughout its tenure.
In fact, after the segment regulator, Insurance Regulatory and Development Authority (Irda), introduced new guidelines on Ulips last year, sales of single-premium products ?both at the individual and the group platform ?have grown vis-a-vis non-single premium products.
Data for first-year premium of life insurance companies for the period ended September 2011 show that 22 private sector life insurers mopped up R2,102.47 crore in the period against R1,921.97 crore during the same period in 2010 in the individual category.
In the group category, the growth of single premium was almost 40% during the same period. In contrast, the mop-up in the individual non-single premium category dropped 44% in the same period. Life Insurance Corporation, the market leader in single-premium products, increased its single-premium market share in the group category.
For insurance companies, selling single-premium products reduces their cost as they do not have to pursue the renewal every year and there is no chance of the policy getting lapsed. Single-premium products suit those with irregular income or who have a lump sum available to invest. The new Irda guidelines have made it clear that single-premium policy cover will now be based on the age of the policyholder rather than the policy?s tenure. Though the insurance regulator has fixed 2% commission payable to agents for selling single-premium policies, the products come with higher premium compared with regular premium policies and the entire sum is to be invested at one go, making it lucrative to sell them.
Group segment includes gratuity, superannuation, leave encashment and other retirement savings solutions of companies. The premiums paid by the corporates are tax-deductible expenses and the benefits received by the employees are also tax-exempt, subject to I-T rules. Prakash Praharaj, chief financial planner, Max Secure Financial Planners, says with the rising interest rate scenario and, especially, when the 10-year G Sec yield is around 9%, manufacturers are able to offer higher rates on these products. ?The corporates, in turn, are benefiting by negotiating with various manufacturers for a better rate. But the manufacturers will face challenges in future to maintain the rates when the interest rate declines,? he says.
At the individual level, the growth of single-premium products is also driven by the growth in home loan as banks are insisting on insurance cover for the loan. Moreover, banks offer loan on the premium, which does not involve immediate cash outgo by the borrower. Though most of those who sell single-premium Ulips will say that the policy will give tax benefits under Section 80 C of the Income Tax Act, 1961, one must also read the sub section 3 of the 80C, which says that a deduction is available only up to 20% of the sum assured on the policy. This sub-clause clearly means that the entire premium invested in a single-premium policy cannot be claimed as a deduction.
As per Irda norms, the minimum sum assured for a single-premium product has to be five times the premium paid. The sum assured cannot be reduced, except in the last two years of the policy. Even at maturity, as per Section 10 (10) D, the premium should not exceed 20% of the cover in any year of the policy?s tenure so as to make the amount tax-free at maturity. Otherwise, the maturity amount is added to the total income of the person for that particular year. So, single-premium policies are disadvantageous from the tax point of view. For investors in the 20-30% tax bracket, the tax payable will be higher than lower tax bracket.
Analysts also say that after the series of policy rate hikes by RBI, it is now anticipated that the interest rate has reached the peak and may not increase further. Once inflation stabilises, the rates will start declining and debt funds will generate good returns.
Some insurers have made the most of this signal by selling single-premium products to prospective buyers; some have even convinced investors that it is the right time to enter the equity market. Vikas Kumar Mahajan, a certified financial planner, says it is important for an investor to time the market when investing in single-premium products.
?One should invest in debt fund when the market is at its peak and switch to equity when it has bottomed out,? he says. Look at products where one can switch funds without any charges and use the option at regular intervals to balance the asset allocation.